Should you join the rush back to buy-to-let?

Would you buy a property you haven’t seen? I wouldn’t, and I think most MoneyWeek readers wouldn’t either.

But others would. “Buy-to-let investors are increasingly buying properties that won’t be completed for many months if not years,” says Claire Carponen in The Times. And that’s not just the case in central London. Even in Manchester – which only a few years ago was awash with unwanted two-bedroom new-builds – there is a severe shortage of stock: “there are only 39 new-builds available to buy in Manchester city centre.”

Add in the fact that rising house prices have allowed investors to once again start withdrawing equity from old purchases to finance new ones, alongside the new rise in the availability of high loan-to-value buy-to-let mortgages, and you begin to see why buy-to-let investors are once again “competing with homebuyers” in UK cities. However, take a closer look and you might begin to think you see something else – a new bubble mentality.

According to the Financial Times, “more investors are now turning to the buy-to-let market for capital growth instead of income”. With rental yields in many places too low to justify purchases (the national average is 5.2% but yields in London are well below that), the “motivation to invest” has changed. There is nothing wrong with looking to make capital gains. But these two things together make us a little nervous. Buying off-plan comes with particular risks – if the price falls after you have paid your deposit but before you complete, you will find yourself paying more for the property than it is worth. Worse, you may find you can’t get a mortgage on it and you lose your deposit (as happened to a good many people in 2008).

Buying just for capital gain comes with risk too: one thing that makes property a sustainable investment is the idea that your yield at least covers all your costs. If that isn’t happening – and prices then fall – you don’t have a long-term asset, you have a long-term liability. With interest rates at 300-year lows, there is no reason to worry about all this in the short-term.

But if you are going to join the new market frenzy, do at least give yourself some medium-term protection by getting the cheapest possible mortgage. The best available at the moment, says The Times, include Principality Building Society’s two-year tracker. You need a 40% deposit for this (the loan to value is 60%), but the rate is a mere 1.99% (rising to 4.99% after the two years). Otherwise, The Mortgage Works has a similar 60% loan to value deal at 2.49% and, for those with a smaller deposit, Accord Mortgages has one at 2.69% rising to 5.99%.

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