Why Savvy Huddersfield Buy-to-Let Landlords Don’t Use 10-Year Mortgages.... And the reason you shouldn’t either

I know of many Huddersfield buy-to-let landlords who fell into property investing by accident. Many didn’t want to sell their family home when the Huddersfield housing market crashed in the Credit Crunch of 2009/10, yet still needed to move (often for work). They thought they would keep their Huddersfield family home in case they ever moved back to Huddersfield. 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 Huddersfield buy-to-let landlord's journeys!

 

Many of you Huddersfield 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 Huddersfield landlord in the last ten years has

seen their investment rise by an average of £65,500

and has earned in rent (before costs) £83,104.

 

Many of you reading this have started to learn about investing and creating a property portfolio by buying additional Huddersfield homes to rent. The average Huddersfield 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 Huddersfield buy-to-let landlord in the 56-to-58-year age range, one thing I learned about savvy buy-to-let investing, the shrewd Huddersfield landlords tend to want longer-term mortgages.

 

Taking longer-term mortgages reduces the risk to the landlord.

 

It sounds counterintuitive, yet it comes down to leverage. Let me explain that whilst leverage is formidable in buy-to-let, it is also quite risky.

 

Before I explain why some readers might not know what leverage is and how it relates to mortgages and buy-to-let, two-thirds of landlords are debt-free, yet those landlords who have come into the property investment game 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% and borrowing the other 80%, if you calculated your return on an investment base only the money that you put into the deal, then that is what is called leverage (i.e. using borrowed money as a funding source when investing in property and generate greater returns on borrowed money).

 

You would think, as, say a typical 55-year-old Huddersfield landlord, you would want to be only taking a mortgage out for however long you intend to work (say ten years at most) – meaning your portfolio would be all bought and paid for by the time you retire. Yet the clever buy-to-let Huddersfield 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 say ten years, compared to a 25-year mortgage, during those ten years, your monthly mortgage payments will be particularly high (because the longer the mortgage term, the smaller the monthly 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 Huddersfield landlords, possessing their rental properties debt-free is very important. Yet, I would still seriously consider taking the 25-year buy-to-let mortgage and make additional payments every month to help you to pay the mortgage off early.

 

Therefore, as an example, if you have a bad couple of months without any rent coming in or unexpected bills, you can return to making the mandatory lower monthly mortgage payments without getting your property repossessed.

 

So, by taking on the longer-term mortgage, you decrease your risk because it has the lower required payments.

 

Let me give you an example - if our Huddersfield landlord wanted to buy a Huddersfield terraced house property for say £135,200 and put down a 25% deposit of £33,800, the best buy-to-let deal I found online on the day of writing this article was a 1.79% Santander 5-year fixed-rate buy-to-let mortgage.

 

Looking at the mortgage payments per month when comparing the mortgage terms; on the 10-year mortgage, the mortgage payment would be £931.65 per month. Therefore, our landlord would have to top up from personal savings to make up the monthly mortgage payments. Whilst if they choose the 25-year mortgage, the mortgage payment would be £428.31 per month. This would mean our landlord would be in profit from day one.

 

Some might say though the longer term means more interest payments, as it's 25 years and not 10 years. Yet, at today's low interest rates, that would only mean an additional £16,694 in interest payments spread over 15 years – not much in the grand scheme of things.

 

 

	10-year Mortgage	25-year Mortgage
25% Deposit Required	£33,800	£33,800
75% Mortgage Borrowed	£101,400	£101,400
Annual Interest Rate	1.97%	1.97%
Mortgage Length (in years)	10	25
Mortgage Payment per Month	£931.65	£428.31
Sum of Mortgage Payments	£111,799	£128,493
Interest Cost	£10,399	£27,093

 

 

Therefore, by taking the longer-term mortgage, as a savvy Huddersfield landlord, you are 'cash flow positive’, meaning you can build a reserve fund for every one of your rental properties to enable you to deal with any unforeseen voids and repairs.

 

The best way to deal with a buy-to-let property is to see it as a small mini-business, and as with all businesses, you need to grow your income and reduce your expenses whilst in the background provide a decent rate of return for your investment.

 

The greater the amount of mortgage debt you carry, the greater your monthly mortgage payments, and the simple fact is, the shorter the mortgage term, the higher the monthly mortgage payments. So, if you take on a sensible level of mortgage debt and be ‘cash flow positive’, you can profit from much better returns without taking on excessive risk.

 

These are my thoughts - please share yours.

 

P.S. Before I go, I have to say this to cover my proverbial. My comments are only a very brief commentary on the issues raised and should not be relied on as financial advice and that no liability is accepted for such reliance, and that anyone needing such advice should consult a qualified financial adviser or other authorised person.

 

Huddersfield Homeowners Profit By £35,320 in Last 5 Years… yet Bitcoin investors would have made £8,163,180 in profit. Is investing in ‘Bricks & Mortar’ dead?

Investing in property has historically been a sound investment, yet alternative investments (like Cryptocurrency) have been gaining traction over the last five years. So, should we all ditch buying our own home and buy Bitcoin?

 

Cryptocurrency with such names as Bitcoin and Ethereum are being bandied about as the new investment vehicle everyone should be investing in. But is Crypto a sound investment or just an ‘end of the seaside pier one arm bandit’ speculation?

 

Well to start, I need to discuss the difference between investing and speculation.

 

I have always seen investing as making a thorough detailed evaluation (and you are realistically sure your principal lump sum is relatively safe), you then have an opportunity to make a profit. Whilst speculating is all about putting your money into an asset that has ambiguous protection of your principal lump sum … and you have an opportunity to make a large profit but also the potential to make a huge loss.

 

In a nutshell, investment should be as interesting as watching paint dry and speculating should be as exciting as putting all your money on red on the roulette wheel.

 

So, let’s see what has happened to both Cryptocurrency and Huddersfield property in the last five years.

 

The average Huddersfield home five years ago was worth £163,920, today it’s worth £199,240.

 

We now ask, what would have been the return if you had invested the same amount in Bitcoin?

 

If you had invested £163,920 into Bitcoin in 2016,

it would be worth £8,327,100 today.

 

What about the return if you had invested the same amount in Ethereum?

 

If you had invested £163,920 into Ethereum in 2016,

it would be worth £27,068,100 today.

 

Yet only In June, when China placed stringent controls on how its population can use Cryptocurrency, Bitcoin dropped in value by 30% in one day. Also, this year, we saw another fall in Bitcoin when Elon Musk tweeted that Tesla were banning the acceptance of Bitcoins to buy its cars.

 

Can you imagine the value of your Huddersfield home dropping in value by £60,768 in just one day because of one tweet?

 

So, if Cryptocurrency is speculation and extremely high risk, surely buying your Huddersfield home is an excellent investment?

 

It is my opinion that purchasing a home to live in is a massive financial choice that can give you peace of mind and a lovely place to live, yet it is not an investment. I know this is going to sound strange coming from someone in the Huddersfield property industry, but whilst I know it’s common for people to think of their Huddersfield home as an investment, I believe nothing could be further from the truth.

 

I am not suggesting every 20 and 30 something should avoid homeownership, but if you are edging towards buying a Huddersfield home because you think you are making a savvy investing choice, think again.

 

The concept that the home you live in can be an investment comes from the statistic that, historically, property values increase. We all know someone, our Mum and Dad or Grandparents for example, who purchased their Huddersfield home in the 1950’s or 1970’s for the price of an Xbox and it’s now worth more than you make in ten years in salary.

 

Yet, I believe, it’s not an investment only because it goes up in value.

 

Between 1989 and today, Huddersfield property values, after removing inflation, have gone up by 50.37% … sounds great until you realise that is only 1.57% growth per annum (after inflation).

 

Sounds rubbish, doesn’t it?

 

But guess what? Does it really matter?

 

Even though your Huddersfield home’s value has outperformed inflation, there are other reasons your Huddersfield home is not an investment.

 

A real investment needs more than the outlook of an increase in value.

 

A home has a more important primary purpose.

 

Possibly the specific biggest reason why your Huddersfield home is not an investment is because its prime purpose is providing a roof over the heads of you and your family. One of the most rudimentary issues that makes an investment an investment is your capability to decide the timing of your possession of the investment.

 

A true investment requires you to buy it and sell it at times (and under situations) that are probable to exploit your investment return, yet since your Huddersfield home is your family’s shelter, you will have hardly any power over the sale and purchase of your Huddersfield home from an investment perspective.

 

The absence of ‘real’ control over the timing of buying and selling our Huddersfield homes (and note I use the word home and not house) has had a significant harmful effect on property as an investment.

 

In all my years in the property profession, I have seen numerous Huddersfield people buy houses at the top of the market (1988 and 2008) because that was the time that they required a home for their family, but those same people became stuck when having to sell their homes a few years later because of personal circumstances, albeit for a loss.

 

Then I have seen other Huddersfield people buy at the bottom of the market (1993 and 2011) because that was the time that they also required a home for their family, and those same people had to sell their homes a few years later due to personal circumstances, albeit for a huge profit. Are the second set of people more savvy investors? No, it was just good or bad timing, and that is not uncommon when it comes to buying homes, and so has to, in my opinion, exclude a home as an investment.

 

A Huddersfield home cannot be an investment

if you never plan to sell it … and not buy another home.

 

While it is fact that Huddersfield homes usually increase in value, there is only a partial opportunity to tap into that growth. The best way to sell your Huddersfield home is after it has experienced a massive amount of value increase, sell at the top of the market, move into rented accommodation, then buy at the bottom of the market. Nevertheless, how do you know when it is the top and bottom of the property market (and moving home is considered the third most stressful thing you can do after death and divorce).

 

That doesn’t sound like an investment to me, does it to you?

 

Ok, most people sell and buy another home, so when you do sell your Huddersfield home, you will have to use the profit you have made from the sale of your original Huddersfield home to purchase the next home as you will be moving from one home to another. This means your profit (equity) is trapped profit.

 

The only time that doesn’t happen is when you either trade down to a less expensive home, or move into rented accommodation, yet both scenarios are quite rare occurrences.

 

Using your Huddersfield home as a bank account?

 

In the early 2000’s, many banks and building societies were encouraging homeowners to re-mortgage their homes as property values rose by 15%+ a year. By extending the term of the mortgage, you could easily borrow £20k, £30k+ for fancy holidays and new cars and the monthly mortgage payments would be lower – that was like free cash!

 

Known as equity-stripping, a lot of Huddersfield homeowners found out the hard way during the Credit Crunch that they had in fact bought themselves negative equity when property values crashed. That left them powerless to re-mortgage to lower the monthly payments when the interest rates dropped in 2009, yet unable to sell to move to a less expensive property because of the negative equity. Finally, to add insult to injury, as the mortgage term had constantly been pushed into the future, they had the prospect of having to pay their mortgages until their late 60’s/early 70’s.

 

Bitcoin doesn’t need a boiler replacing every ten years.

 

Every homeowner knows it costs money to maintain their home. Replacement windows, soffits, roof, carpets, kitchens, bathrooms, boilers, flat roofs – the list goes on. Over the 25 years of a mortgage, that can add up to many tens of thousands of pounds, yet one can justify those costs since your home is providing you shelter. But that gets back to the original principle - a home is a shelter, and not really an investment.

 

But isn’t renting out a property an investment?

 

The solid fact is that your Huddersfield home, the home that you live in, basically won’t provide any form of cashflow when you are a homeowner, unless you move out and rent the whole house to someone else. That is called a buy-to-let investment – of course that is an investment and I know many Huddersfield buy-to-let landlords who make a decent living at renting out their rental properties.

 

Yet, that wasn’t the point of the question I asked originally – “is buying a home, for you and your family to live in, a good investment?”

 

Of course, you could take in a lodger or rent rooms out as an Airbnb, and this will help you pay your mortgage, Council Tax and other costs associated with homeownership, so it can be worth it for many. However, an “Englishman’s home is his castle” is quite apt and most of us aren’t good with sharing it with strangers.

 

What do we buy homes for then?

 

To conclude, I believe the principal reason why so many Huddersfield people consider their home (not house) to be an investment is because we are all obsessed about how much our home is worth.

 

We are all guilty of checking out Rightmove when a property on our street comes up for sale. Yes, we are nosey by looking at the pictures, yet the most important thing is what price they’re asking and how it compares to our home. Our home is our biggest tax-free asset and especially when it goes up in value, which it certainly has done for the last nine or ten years, it certainly can feel like an investment then.

 

However, during the five property crashes that we’ve had since World War II, not only did property values not increase, but they fell. Some dropped dramatically. For homeowners in that position, not only was their home not an investment, but it had become a huge liability.

 

Thank you for taking the time and trouble in reading this article. I must stress that I’m talking about our own homes as an investment and not buy-to-let investment which is a completely different animal and certainly is an investment, if done correctly.

 

One final thought - for those of you buying and selling Cryptocurrency – enjoy your roller coaster. For me, the thing about property is this; you can touch it, you can feel it, there is something reassuring about a 9-inch red brick and tiled roof. It’s home, it’s where you bring up your family, it’s where memories are made and the best investment you can make in life is with them, your family … and for that – it is a priceless and enduring investment.

 

These are my thoughts, please tell me what yours are.