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Many landlords currently choose to take out two-year discounted mortgage deals because they are cheaper than longer-term loans.

The Bank of England’s Financial Policy Committee plans to make it harder for some landlords to secure short-term mortgages after being granted greater powers over the buy-to-let market by the government.

Regulators have expressed concern about aggressive buy-to-let lending practices at some banks, mainly because they fear that a number of property investors are taking on too much debt and will not be able to cope when interest rates increase. Too many have got used to the almost nonexistent base rate that has historically averaged over 3% and are ill prepared should they return to the average.

Regulators want to see more landlords sign up to longer term five year rates which tend to be higher, meaning that borrowers could have to pay thousands of pounds more over the life of the loan. e.g. based on a £150,000 loan at the best two-year rate of 1.59% (£199 a month) compared with borrowing the same sum at the best five-year rate of 2.49% (£311 a month) over five years, the additional £112 a month would mean the borrower paying £6,720 more.

Is £6,700 scandalous? Should investors stop investing? Perspective is required to answer these questions which the following illustration should add.

Why do landlords invest in property? For the security of the asset and the handsome returns that come from rental income and the capital appreciation of the asset.

Based on a £150,000 loan (typically 75% LTV) the example property would be worth £200,000.

The average UK rental yield is approx. 5% so this example property would gain £833 pcm in rent.

The average UK capital growth is 8.1% p.a.

So realistically although this is suggested to cost an additional £6,700 the property could rise by the historical average, £16,200 in the first year.  (£1,350 pcm)

Equally rent, which is reported to be rising currently, at the current average of £833 pcm minus 10% for the letting agent and the mortgage cost at the higher rate £311 a month leaves over £400.

Returns of over £20,000 a year is attractive and this is why investors are still investing in property.

If lenders interest rates reach 5.5-6% then the rent and mortgage amounts do become close meaning the profit would be the long term capital appreciation.

Long term capital appreciation profits alone are still a return most investors see as handsome.

The current situation means the attraction of positive cash flow every month as well as capital appreciation makes investment in property preferred by all looking for extra security and great profit.

An informed investor is a successful investor!

For the current research results and the best choice of property investments, as selected by property buyers, in the UK market do not hesitate to contact your Earnest Knight Consultant today

Information is free and can only be of benefit to you

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