The average BTLer has a 21% mortgage and 500% rental cover at 5%

cells

Conrad wrote: »

Many use B2L as a revenue generating business, like any other, and certainly have no compunction to pay down debt. They live on the revenue just as a Lawyer lives on her fee revenue. They save the revenue to buy further property. My mortgages are generally around 2.5% - so £100k paid off saves me £208.33 pm, but that £100k re-invested generates both more rent and capital growth.

Sure if you feel the mid term return on capital invested is better in more property then go invest in more property. But we know most landlords dont do this as the majority only own 1 rental and the second biggest group own just two. Also you can pull capital out later if you need to do so via a remortgage or further advance

Your point about LTV bands is not really relevant - one typically soon finds their equity increasing by capital growth alone - and will thus qualify for better deals in just 2 years (my actual experience)

Yes I am aware that of this , if prices increase then the 10-15% return is only for 2 years. If they dont then its that much until the LTV naturally passes the next tier. Either way a 10-15% return in a risk free class would make you one of the best fund manger on earth

I will see how the income tax thing pans out - but rents are fast rising to accommodate the tax increases anyway

I dont know where you are based in London but in Hackney this is not true, rents are down about 5-10% vs 6-12 months ago

The additional stamp duty will have a bigger impact because most investors are just the 1-2 property investors who have little to no understanding of taxes even when they pay the tax they probably wont know whats going on the accountant will do the return and they will hand it over mixed in with their normal income

Foxtons says their business is down ~1/3rd from a year ago and its a listed company so I dont see why they would lie (probably illegal for them to lie)

I dont see a crash but I can certainly see 5 years of flat prices. in fact there has already been a small correction here in hackney of about 5% imo

Landlords often have more property than official stats would indicate, for example spouses may have 3 each, which in reality means 6 each (for all intents they retire having 6 properties worth of household rental income

How do you know what stats are used?

If you look at someones credit file it will quite clearly show how many mortgages they have and the amount and afaik the government now has access to credit files.

cells

lisyloo wrote: »

Because landlords can offset mortgage interest against income (until April 2017 when that starts to be reduced). I thought that was conventional wisdom.

So how does that help or make not paying down debt a good idea??

I understand the argument about psycology (but can't spell it). I stooze my (0.74%) mortgage but psychologically I'd rather pay it off.

Yes if you are on an ultra low historic rate perhaps you can stooze.
But this does not apply to many people as a new mortgage will be priced higher than savings rates else banks wouldnt work. Plus any stooze interest is taxed at 40-45% and plus#2 soon you get taxed on the stooze interest at 40-45% and cant use interest as a cost

There are sometimes good reasons not to do what's mathematically best (as I told my husband regarding him putting money into my pension).

This is not true, the problem is we cant see into the future or price risk 100% correctly in which case we are not doing what is mathematically best we are trying to do what is best given certain assumptions and those assumptions can be wrong and lead to bad decisions not the mathematics itself. but that is probably what you meant

westernpromise

Thrugelmir wrote: »

You didn't read the entire article.



There remains a huge chunk of highly indebted newbies. These are the people that could tip the scales for everyone. In the same way that it only takes around 15% of businesses in the UK to have a downturn to create a recession.

I did, and I get that point. Hypothetically, if ~650bn is unmortgaged then ~350bn is mortgaged and the mortgage value on that of 214bn implies 61% leverage. However, what that omits is the case of the borrower with three properties, of which two are wholly unmortgaged and the third has a 61% mortgage on it. Such an individual would then have a mortgage worth 21% of the whole, and hence we are back to my point that on the face of it there is very little over-leverage involved.

The idea of there being "a huge chunk of highly indebted newbies" does not seem visible in that data. If it is so, then I guess it would be visible. If we had gone from say £114bn of debt and £900bn of property in the past, to today's £214bn and £1000bn, then in effect the whole £100bn increase in the value of the sector has been funded by £100bn of debt. So the new entrants are buying 100% with debt. Is anything like that in evidence?

Cells observes that

LTVs drop rapidly in a rising market. If a person bought a flat in london with 80% LTV on an interest only basis five years ago it now has a LTB closer to 40% simply die to rising prices.

What we're seeing here is 20% LTV so the implication would be that most of these were bought years ago, not recently; or if recently, without much leverage.

Conrad observes that

Landlords often have more property than official stats would indicate, for example spouses may have 3 each, which in reality means 6 each

I note that the number of landlords is sometimes stated as 2 million, which is fewer than one property each. As you cannot be a landlord with 0 properties it seems clear that if 2 million is correct it is more likely 1 million couples with 1.8 properties per couple (or some point in between, obvs).

And if landlords really do "have more property than official stats would indicate", then it's presumably not in the stats because it's unmortgaged, which points to even lower gearing in this sector.

What I am not seeing is how any ostensible agenda of forcing landlords out to let FTBs in is going to work. The presumed overly leveraged landlord seems to be too rare a bird for his exiting to make any difference to overall O/O levels of occupation. Another landlord is always going to look like a better bet than an FTB to a mortgage lender, who will have an option of lending a lot to an FTB or rather less to a landlord, and whom they can charge more for that loan. I'm struggling to see why, if this handful of over-leveraged individuals does exit, they won't just be replaced in the sector by less-leveraged landlords.

lisyloo

So how does that help or make not paying down debt a good idea??

Because it reduces your income and reduces your tax.
it does assume that you don't just put it under the mattress.


If you are saying totally unsophisticated investors who can't see further than savings rates are better off paying it off then I agree and there is nothing to argue.


I was under the impression that most property investors were realtively sophisticated and by that I mean could open a Hargreaves Landsdown S&S ISA.

Plus any stooze interest is taxed at 40-45% and plus#2 soon you get taxed on the stooze interest at 40-45% and cant use interest as a cost

How about an equities ISA then? or at certain time NS&I has been an attractive options, also pensions (perhaps the wife can salary sacrifice).

This is not true

It's probably semantics but it's not all about maths.
You might be happier paying it off or perhaps not being a landlord than doing what's is mathematically best.

Thrugelmir

lisyloo wrote: »

Because it reduces your income and reduces your tax.
it does assume that you don't just put it under the mattress.

Which means that gain has to come from capital growth. I remember one well known entrepreneur saying my aim is to make a profit first. I'll mitigate my tax liability once I've created a profitable business. To pull a cart you need the horse first. Decisions shouldn't be based on variable factors such as the tax regime of the current day. As there's no long term certainty.

cells

lisyloo wrote: »

I'm sure you understand this.
It is the conventional wisdom to keep your costs (interest) high, because that reduces your income and reduces your tax.

if your BTL burnt down the damage will minimize tax as you can offset it against income. The aim is not to minimize tax its to maximize profit

How about an equities ISA then?
BTW - I don't get taxed on my stooze interest.
It was in NSI index linked certs for a while (when RPI was high), now it's in ISA, so there are tax free vehicles available.
Even pensions.

Which ISAs offer over 3% now? Direct stocks and shares are not all that popular with most landlords or most the public for that matter and its not a comparable investment as stocks and shares can go down in nominal prices whereas money has a fixed nominal amount.

this debate is not even about is it better to pay down debt or not. its a debate about what is a better return on capital investments in savings/bonds or the stock market. Its not really comparable

cells

Paying down debt: £500k property with £340k mortgage.

Remortgage on a 2.25 year fix for 2.34% £2000 fee
Remortgage on a 2.25 year fix for 2.09% £2000 fee (need to pay down £15k to get to lower band)

£19.9k for the first deal £17.3k for the second deal over the 2.25 year period

The £15k payed down effectively returns £2.6k over 2.25 years which is effectively a 7.36% annual return on your £15k 'investment' risk free

Just one possible example. The nearer you are to the next band down the higher the effective return. If you have say a £326k mortgage and paying down just £1k puts you into a lower band that £1k effectively returns 60% annually using the same numbers above.

Conrad

wotsthat wrote: »

Most BTL'ers only have the odd house or two and are regular people. Regular people pay off mortgages even if they'd be better off holding the debt because they feel better with a smaller mortgage.

Oh yes I recognise that picture all to well, but maybe it's because I've always been in financial services - the people I've worked with - some very sharp cookies indeed - tend not to set too much stall by paying off mortgages in a low rate landscape.


I'm minded of older folk sitting in their £600k house, all that money locked up until they die - some of us prefer a measure of mortgage debt and putting capital to good use, after all it's only luck that equity has accrued so large.
What if the market had gifted them halve that figure would they feel out of pocket? Definitely not, so it's not much of a tautology to imaging using this free gifted market equity instead of letting it sit there


Psychology has a big role here.

Thrugelmir

cells wrote: »

Paying down debt: £500k property with £340k mortgage.

Remortgage on a 2.25 year fix for 2.34% £2000 fee
Remortgage on a 2.25 year fix for 2.09% £2000 fee (need to pay down £15k to get to lower band)

£19.9k for the first deal £17.3k for the second deal over the 2.25 year period

The £15k payed down effectively returns £2.6k over 2.25 years which is effectively a 7.36% annual return on your £15k 'investment' risk free

Just one possible example. The nearer you are to the next band down the higher the effective return. If you have say a £326k mortgage and paying down just £1k puts you into a lower band that £1k effectively returns 60% annually using the same numbers above.

Have you allowed for the fact that capital repayments will be from after tax income?

Conrad

cells wrote: »

Paying down debt: £500k property with £340k mortgage.

Remortgage on a 2.25 year fix for 2.34% £2000 fee
Remortgage on a 2.25 year fix for 2.09% £2000 fee (need to pay down £15k to get to lower band)

£19.9k for the first deal £17.3k for the second deal over the 2.25 year period

The £15k payed down effectively returns £2.6k over 2.25 years which is effectively a 7.36% annual return on your £15k 'investment' risk free

Just one possible example. The nearer you are to the next band down the higher the effective return. If you have say a £326k mortgage and paying down just £1k puts you into a lower band that £1k effectively returns 60% annually using the same numbers above.

Well I have found the B2L's increasing in value so fast that there was never a need to input more capital to access a better deal.


Constantly redeploying capital allows more acquisitions, more income, more capital growth, but always keeping to a comfortable LTV


The really big Landlords I've known got there by constant expansion, never just gradually paying down capital. I've never known any go bust - they are far too money centric to let that happen. If they need to they can always sell a few places to pay down debt but it rarely happens


Also rents can rise over time relative to mortgage payments - after 20 years it might be worth having 10 properties with mortgage debt topped out around 15 years in, then the rents just keep on rising...........