Sunday 27 April 2014

Buy-to-let comes top for investment

Buy-to-let investments have outperformed all mainstream investments over the past 18 years, with annual returns of more than 16pc, according to a study.

Former economist Rob Thomas investigated how much £1,000 would be worth now if it was invested in various asset classes in the final three months of 1996 – the year buy-to-let mortgages were first introduced.

He said every £1,000 invested in an average buy-to-let property bought with a 75pc loan-to-value mortgage was worth £13,048 in the final quarter of 2013, a compound annual return of 16.3pc. These bumper returns were largely due to the mortgage, which “magnified” investors’ buying power in a process known as leverage.

A cash purchaser would have seen each £1,000 invested grow to £4,791 by the end of 2013 – a compound annual return of 9.7pc.

The report found the same investment in UK commercial property would have grown to £3,654. If the capital was invested in UK equities it would now be worth £3,082 and UK government bonds would have grown to £2,924. If the money was put in cash it would be worth £1,949.

The study did not include gold, which has fallen fast in recent years but was the best performing asset in the 2000s.

Leveraging is potentially risky as interest costs can rocket. But in the period since 1996 returns outstripped the interest owed on the loan. The research assumed that buy-to-let investors who took out a mortgage started with a single property worth the UK average and reinvested in more properties each time their income provided a 25pc deposit and covered the purchase costs. It assumed cash investors bought a single property and income was only reinvested once enough gain had been accumulated to purchase another property outright.

The study was undertaken for buy-to-let lender Paragon Mortgages. The report predicted buy-to-let returns would continue to outperform other investments over the next 10 years. With interest rates expected to rise, however, many are questioning whether now is the time to invest in buy-to-let.

Calculations by the Telegraph earlier this month showed some buy-to-let investors could see their rental income fall short of their mortgage costs as early as 2017 if interest rates rose to the levels hinted at by Mark Carney, Governor of the Bank of England.

Mr Carney said the current Bank Rate – 0.5pc since March 2009 – could rise sixfold to 3pc as early as 2017. Landlords who are most at risk of making a loss are those who have flocked lately into the market, or who have borrowed against their existing buy-to-let portfolio recently, with interest rates at all‑time lows. Buy-to-let borrowing surged by 44pc during 2012 and 2013, according to lenders’ combined data. --


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