Why buy-to-let landlords don’t use 10-year mortgages

I KNOW of many Newbury buy-to-let landlords who fell into property investing by accident.

Many didn’t want to sell their family home when the housing market crashed in the Credit Crunch of 2009/10, yet still needed to move (often for work).

They thought they would keep their family home in case they ever moved back to Newbury.

Yet by keeping it, it couldn’t remain empty (there was still a mortgage to pay on it), so they ended up renting their home out.

And that was the start of many buy-to-let landlord’s journeys.

Many of you landlords reading this have had your fair share of problems, from tenants doing a midnight flit, rent arrears and troublesome tenants, yet also had your rewards.

The average Newbury landlord in the last 10 years has seen their investment rise by an average of £146,800 and has earned in rent (before costs) £132,720.

Many of you reading this have started to learn about investing and creating a property portfolio by buying additional homes to rent.

The average Newbury buy-to-let landlord now owns 3.38 properties that generate an impressive passive monthly income with the bonus of growing their household net-worth through growth in the value of their buy-to-let portfolio.

With the average landlord in the 56- to-58year age range, one thing I learned about savvy buy-to-let investing, the shrewd landlords tend to want longer-term mortgages, which reduce the risk to the landlord.

It sounds counterintuitive, yet it comes down to leverage.

Let me explain what leverage is and how it relates to mortgages and buy-to-let.

Two-thirds of landlords are debt-free, yet those who have come into the property investment games in the last 10 or 20 years have had to use borrowed money (mortgages) to finance their deals.

Therefore, by putting down a small amount of, say, 20 per cent and borrowing the other 80 per cent, if you calculated your return on an investment base only the money that you put into the deal is what is called leverage (ie using borrowed money as a funding source when investing in property and generate greater returns on borrowed money).

You would think, as a typical 55-year-old landlord, you would want to be only taking a mortgage out for however long you intend to work (say 10 years at most), meaning your portfolio would be all bought and paid for by the time you retire.

Yet the clever buy-to-let landlords I talk to don’t see their portfolio as having to be paid off (and mortgage-free) by the time they retire.

They have understood how to utilise and administer their mortgage debt rationally to enhance their returns without taking on unwarranted risk.

By taking a short-term mortgage of 10 years, compared to a 25-year mortgage, your monthly mortgage payments will be particularly high (because the longer the mortgage term, the smaller the payments will be).

Also, you can pay off a 25-year mortgage in 10 years, but you cannot pay off a 10-year mortgage in 25 years.

Longer mortgage terms mean lower monthly mortgage payments, which in turn means greater cash flow and more elasticity within your rental portfolio.

Now to some landlords, possessing their rental properties debt-free is very important. n Continued next week