Buy-to-let is a long-term safe haven for your savings

Investors are flooding back into the property market spurred on by the promise of a healthy rental return, discovers David Spittles
A perfect combination of low interest rates, strong rental demand and competitive mortgage finance is encouraging investors back into a buy-to-let market that is energetically recovering from the credit crunch which shook the world five years ago.

With disheartening returns on savings and the outlook for pensions bleak, buyers are showing a keen interest in new-build, with 50 per cent of all stock going to buy-to-let investors, according to new research.

Flats at Barratt’s Renaissance scheme, part of the regeneration of Lewisham town centre
From £190,000: flats at Barratt’s Renaissance scheme, part of the regeneration of Lewisham town centre, are proving popular with buy-to-let investors who see the area’s good transport links as a major attraction for prospective tenants. Call 0845 871 0005

The capital is set for a decade of buy-to-let growth, with the Olympic boroughs of Newham, Tower Hamlets and Greenwich expected to deliver the highest total returns of more than nine per cent a year.

Some areas will deliver more of their returns through capital growth, says Savills. Properties in Kensington & Chelsea and Westminster boroughs are forecast to return between eight and 8.5 per cent, but less than 40 per cent of total returns will come from rents.

Outside London, properties in Elmbridge (Surrey), Reading, Woking and Milton Keynes are forecast to give investors net returns of more than eight per cent a year, while buy-to-lets in Brighton, Oxford, Portsmouth and Medway are predicted to generate returns of at least 7.5 per cent.

Experts say the dynamics of the market point to buy-to-let being sustainable over the medium to long term. Research released this week by investment management firm Barings reveals that one in three Britons expects property to form part of their retirement income.

This year, the number of privately rented homes in Britain has reached 4.8 million — up from 2.5 million in 2002. In London, private renting accounts for 27 per cent of all homes.

A surge in demand from tenants over the past two years has seen rents rise to record levels, and Savills predicts another 20 per cent increase over the next five years.

Attractive mortgage deals have tempted new investors into the market and encouraged existing landlords to expand their portfolios.

Buy-to-let lending accounted for £3.9 billion (33,200 loans) in the three months to June, which is 18 per cent higher than a year ago.

Lenders, who normally limit buy-to-let loans to a maximum 75 per cent of value and insist on the rent being at least 125 per cent of the monthly mortgage payment, see buy-to-let as a safer option than advancing loans to first-time buyers with small deposits. Arrears on buy-to-let loans are less than in the owner-occupier sector.

Buy-to-let now accounts for about 15 per cent of all mortgage lending. There are more than 800 mortgage deals available, with rates below four per cent. NatWest offers 3.49 per cent fixed for two years while Skipton Building Society offers a two-year tracker rate of 3.84 per cent. Coventry Building Society has a "first-time landlord" deal at 3.75 per cent pegged until October 2014.

Figures from Landlord Centre, a buy-to-let specialist, show that landlords are investing largely in London, with mortgage applications from the capital accounting for a quarter of all business now compared with 14 per cent earlier this year.

Borrowing costs comfortably below property "yields" are boosting the appeal of buying into bricks and mortar.

But deciding where to invest depends on your preference for income or growth, budget available, appetite for risk and exit strategy.


Flats above shops in London offer 17 per cent better rental returns than other rental properties in the same area, according to estate agent Ludlow Thompson. The firm analysed rents in popular high streets, including Clapham, Dulwich, Tooting and Finsbury Park, and found that above-shop property typically delivers a 6.3 per cent yield against 5.4 per cent.

"This can make a huge difference over the lifetime of a property, equating to an additional £40,500 in income for a 15-year period, the normal buyto-let time frame," says Stephen Ludlow, director.

Yields are higher because flats above shops tend to be lower priced. Lenders are reluctant to advance mortgages, meaning buyers have to be cash rich. This shuts out owner-occupiers, keeping a ceiling on values. Yet the flats are popular with tenants such as students and nurses.


Developers report that investors are buying apartments because of the hassle-free, low-maintenance nature of new-build. Though there is normally a price premium, running costs are lower and rents are higher. Developers also offer cut-price furniture packs and sometimes rental guarantees for periods of up to two years.

At Axio, a new scheme in Bow, developer LDL is quoting yields of 7.4 per cent and offering one year's free property management through Foxtons. Prices start at £210,000 for one-bedroom apartments. Call 020 7579 2929.

New-build Axio apartments in Bow
£210,000: LDL, developer of new-build Axio apartments in Bow, quotes rental yields of 7.4 per cent. Call 020 7579 2929


Landlords' costs, which include agents' fees, gas safety certificates and service charges, typically account for 30 per cent of gross rental income. However, investment property is tax efficient.

Mortgage interest costs plus other expenditure relating to the repair and management of the property, are tax deductible, and losses can be carried over from one accounting period to the next to minimise capital gains tax.


HMRC has announced a clampdown on private landlords who fail to declare investment income from property and has set up a task force to recover up to £17 million in unpaid taxes.

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