The Bank of England’s decision to cut its base rate to 0.25% is likely to help landlords in London increase the size of their rental property portfolios.
Building societies and other commercial lenders have already started to reduce the rates they charge on buy-to-let mortgages and it is reported that more are to follow suit next month.
However, fears that cheaper property loans will encourage tenants to take their first step on the property ladder are unjustified.
Denhan Guaranteed Rent calculates that tenants in the capital will continue being better off renting rather than use a flagship government scheme designed to help first-time buyers.
A first-time buyer who uses the London Help To Buy equity loan scheme to borrow the maximum 40% of a £400,000 property would need an annual salary of over £75,000 if they were to pay off the loan by the time the five-year interest-free period came to an end.
The equity loan scheme allows London residents to purchase a new-build home in any of the capital’s 32 boroughs with just a 5% deposit and a 55% mortgage.
However, with new-build homes inside the M25 costing around £400,000, most people using the London Help To Buy scheme will need to borrow £160,000 from the government-backed initiative.
That would mean them making 60 payments of £2666.66 to clear the debt before it accrued interest at a starting rate of 1.75% and then increasing each year at the rate of RPI plus 1%.
Help To Buy borrowers must also cover the cost of the 55% mortgage obtained from a commercial lender.
In the case of a £400,000 property, this would mean a commercial mortgage debt of £220,000 and potential interest-only costs of £367 per month if the home loan carried a 2% interest rate.
Once living costs are added to the financial calculations, the purchaser of the £400,000 Help To Buy property would need to take home at least £4050 per month – the equivalent of an annual salary of £75,075.
And if borrowers fail to clear the Help To Buy debt before selling the property, the terms of the scheme mean they could end up paying back far more than the original £160,000 loan.
This is because the 40% equity in the property remains fixed, so the government would demand this percentage of any future sale price. If, for example, the property sold for £600,000 before the 40% equity loan was repaid, the seller would repay £240,000 to the government.
The Department for Communities and Local Government – the body that operates the Help To Buy equity loan scheme – says it has helped almost 300,000 people onto the housing ladder since the initiative was introduced in 2010.
Before the Bank of England cut its base rate to 0.25% last month, the DCLG said borrowers are not forced to repay the 40% equity within five years and charges made after that time are “significantly less” than the interest paid on a typical mortgage from a commercial lender.
However, average rents in Tooting, for example, are about £300 per week – significantly less than the cost of a £400,000 Help To Buy property.
Tenants may be better off living in your buy-to-let investment, but managing a rental property can take a significant amount of a landlord’s time.
Denhan Guaranteed Rent has a tailor-made solution for landlords with property within the M25. We will not only provide you with a guaranteed monthly rent for up to five years, Denhan’s property specialists will handle every aspect of your rental home’s management.
For details of Denhan’s guaranteed rent scheme, click on the banner below.