Thursday 20 August 2020

How to buy a house for nothing!

I’m currently helping a client (who has taken advice from their accountant, IFA and mortgage advisor) to buy a property that won’t cost them a penny! If that sounds fanciful then read on to find out more…

The first thing to explain is that the client owns their current home and has a good amount of equity in it. It is that equity, along with a buy-to-let mortgage, which will pay for their new rental property. So, whilst they aren’t getting a free house (which really would be fanciful), it won’t actually be costing them anything out of their own pocket.

With house prices near all-time highs, and with the capital being paid down on most residential mortgages too, there is a lot of home equity out there sitting idle. Many don’t want to utilise it to buy yet more property whilst taking on further debt, whilst others see the attraction of doing so, particularly when mortgage rates are at record lows.

In this example, they will take £90,000 out of their current home at an interest rate of 1.44%. As residential mortgages are typically undertaken on a repayment basis, this equates to a monthly payment of £357pcm. 

They will then purchase a £300,000 buy-to-let property, taking out a £225,000 buy-to-let mortgage (at a rate of 1.94% and costing them £364pcm) whilst the £90,000 taken from their own home will cover the necessary deposit, stamp duty, legal fees and provide a ‘buffer’ in case of emergencies.

That means the £300,000 buy-to-let property has been fully funded by the banks via two mortgages, which will cost £721pcm to service. With both mortgages being fixed for five years, they know exactly how much needs to be paid, which they know is affordable to them.

Of course, the newly purchased property won’t just sit empty though. This particular property (a freehold house so there aren’t any leasehold costs to contend with) should rent for £1,200pcm. Whilst this is a fairly modest 4.8% rental return (which is above average in our area), it still means they should receive £479pcm over and above the mortgage payments. 

Unfortunately, there will be other costs, such as insurance, agent fees and repairs. The tax man will want his cut at the end of each year too from anything left over! Nevertheless, as long as the tenant pays the rent, they will have been able to buy a house for nothing, which should earn them a small amount each month for good measure. 

Where the real money is made though, historically at least, is from property price increases. They will now have an additional £300,000 of bricks and mortar that will provide £3,000 of equity for every 1% it appreciates in value. Whilst the reverse is true should prices drop, bear in mind that £15,481 of the £21,420 paid on the residential mortgage over the five-year period goes towards paying down the loan, which becomes equity in their own home.

So whilst it isn’t risk free (no investment is) and taking on debt like this isn’t for everyone, the above is the basic principle as to how many long-term landlords have created wealth by refinancing their properties to buy more as time goes by, without it personally costing them a penny. 

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