All-time low rates, so repay, right? No, borrow more!

A client asked me for my advice on a buy-to-let investment not so long ago. He said he had £200,000 saved up for an investment property and wanted my advice on what to buy. He was looking to get a small mortgage of £50,000 and hence get a good difference between the monthly rent and the interest payments on the loan. Very sensible.

We had worked out that over the years his property would go up in value and stand the test of time, and also give him a kitty for when things went wrong. Plenty of money in that kitty; from experience more than is strictly necessary. I posed the question “what if I could show you how to buy two properties with the same money and you can DOUBLE your gains?” He was interested.

You see here is “le grand truc…” By taking the remaining £150,000 in our example and investing it in further properties you could quadruple your capital gains over time. You wouldn’t quadruple your cash flow as your interest payments would gobble some of that up, but nonetheless the crude example below illustrates my point: by investing borrowed money into further property you will be better off than choosing to borrow less money - you will increase your capital gains over time.

Example: (based on tax rate of 40% earnings between £31,866 and £150,000)
Purchase Price
 £    250,000
 £    250,000
Annual Rental Income:
 £      15,600
 £      15,600
Deposit
 £    200,000
 £      50,000
Loan
 £      50,000
 £    200,000
Interest Rate
2.50%
2.50%
Annual Interest
 £        1,250
 £        5,000
Yield before other costs
 £      14,350
 £      10,600
Net after tax:
 £        8,610
 £        6,360

If we estimate an average price rise of 8% on a property value of £250,000 it would be worth £539,731.25 in 10 years’ time. If you had one property you would gain £289,731.25 (excluding costs of course). Imagine if you had 3 or 4…

If you have any questions or would like to get in touch to talk property, drop me a line on email or call 020 3397 2099.

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Another day, another purchase completed!

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