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Offence vs defence.

Anybody that has been investing in buy-to-let (BTL) over the last few years couldn’t fail to recognise that we have done pretty well out of it. The latest research from Landlord Mortgages has revealed that it has the best returns of any asset class.

Investors who purchased a BTL property with a deposit of £25,000 could expect to a £39,309 profit (157 per cent) over six years. The second most profitable class was gold, which turned a profit of £22,484 (90%). Those poor investors who put their money in stocks and shares would have stayed exactly that ‘poor’, with the FTSE returning a miserly 4% during the same period.

Now anybody who plays sport will know, there are times when it is good to be aggressive; go for a big shot, the knock out blow, the winner! There are also times when a steady more circumspect approach will lead to a winning approach. A long careful rally, a safe shot to the green. The sportsmen & women that can combine these approaches are the ones that become champions. The same is true for investing.

The last 10 years of BTL has encouraged and rewarded a full on aggressive approach. This is buying properties with a minimal deposit (15%) and using an interest only mortgage. Then re-mortgaging to use any potential capital gain as a deposit for the next acquisition. I personally would have certainly been considerably richer if I’d opted for more offence rather than being concerned about my defence.

However, maybe the current climate of slowing housing growth and rising interest rates demands a more defensive play. This is particularly true if you look at the recent research which highlights some of the risk associated with property investment. Using data from the Halifax & the Association of Residential Letting Agents (ARLA) they concluded that a fall in house prices of just 7% would cause 21% of BTL investors to face a capital loss. This increases to over 50% with a correction of 18%. The most vulnerable being those that have invested in the last few years when prices have been at their highest.

If the above sounds familiar, then it is still possible to shore up your position and start playing a more defensive ‘game’. The most obvious way to do this is to opt for a repayment mortgage. This enables you to start reducing the amount you owe by paying off some of the capital. Whilst this is likely to increase your payments in the short term, it will reduce the overall amount that you pay and it also reduces the chances that you make a financial loss should any correction in house prices occur.

It is possible to see the level of increase in your long-term returns of opting for a repayment mortgage by using our INVESTOR APPRAISER . As an example, an investor purchases a £95,000 studio apartment with a 85% mortgage at a fixed interest rate of 5.6%. Rent is £500pcm. Assuming that property prices grow at 2% a year, inflation is at 2% and rents grow by 3% each year over the 25 year investment period. The APPRAISER shows that an interest only investment would return 176% on the capital employed compared to the same investment with a repayment mortgage of 395%. This equates to an annual return of 7% compared to almost 16% by using a repayment mortgage – a huge difference!

If you are tempted to start benefiting from this more defensive approach there are a number of repayment mortgages starting at 4.49%. They also offer a split mortgage which is part repayment, part interest only. This has the advantage of enabling the investor to reduce the size of their loan but also balance this with keeping their repayments low. Remember successful property investment is not about a short sprint for the line – it’s about having a carefully considered long-term game plan.


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