What does the 5% deposit mortgage introduction mean for the buy-to-let property market?

Introduced in March, the 95% mortgages are to be supported by the Treasury: lessening losses for mortgage lenders should the borrower be incapable of repaying and get repossessed, as the Government seeks ‘Generation Rent’ to transcend to ‘Generation Buy’.

This may initially cause some concern for buy-to-let investors as they prepare for tenants to start purchasing their first homes. However, these potential first-time buyers are facing four hurdles that could inhibit their ability to take advantage of the mortgage scheme – which could mean many will continue to rent.

What does this mean for the Portsmouth property market?

Firstly, the mortgage rate for 95% mortgages has increased. The lowest five-year fixed-rate mortgage with a 5% deposit today (with Barclays) is 3.45%, up from 2019’s best rate of 2.75%. This may not sound a lot, yet it makes a massive difference to the monthly mortgage payments.

Secondly, due to pent-up demand post lockdown and the stamp duty holiday, this has increased demand for properties, placing upward pressure on property prices which have made it problematic for first-time buyers to get on the property ladder. This house price trajectory means the average price of a Portsmouth first-time buyer property has risen from £246,651 to £273,135 in the last 12 months. In turn, this means, Portsmouth first-time buyers have had to save an additional £1,324.20 for their deposit to keep up with the house price increase. This impacts the monthly payment on a 30-year mortgage for a Portsmouth first-time buyer, as it increases from £956.58 per month (2019) to £1,157.94 a month today: a significant increase of £201.36 per month.

The third issue is demand for Portsmouth first-time property from buy-to-let landlords is surpassing supply, adding further fuel to the fire of driving up prices. Finally, the fact that most Portsmouth first-time buyers are of the younger generation and it’s the younger workers that have been most at risk of unemployment or salary cuts during the economic crisis.

	5 Year Fixed Rate – 2019	5 Year Fixed Rate – 2021
Purchase Price	£246,651	£273,135
5% Deposit Required	£12,333	£13,657
95% Mortgage Borrowed	£234,318	£259,478
Annual Interest Rate	2.75%	3.45%
Mortgage Length (in years)	30	30
Mortgage Payment per Month	£956.58	£1,157.94
Sum of Mortgage Payments over the whole mortgage term	£344,370	£416,860
Total Interest Cost over the whole mortgage term	£110,052	£157,381

 

Buy-to-let investment

You might say things will change in 2022 but would it surprise you that 95% of mortgages have been available to first-time buyers since the summer of 2010 and were only withdrawn during the first lockdown in 2020?

Since 2010, even with ultra-low interest rates, the number of private rented properties in the UK has grown by 580,000 households from 3.8m households to 4.4m households and will continue to grow.

The notion that buy-to-let property is a strong long-term investment has not altered with the pandemic. Since 1930 with all the crises we have had with WW2, the Oil Crisis, 3 day week, and hyperinflation in the 1970s, Portsmouth property has been a hedge against inflation and in addition, delivers a decent income yield of 4% and upwards. Not bad when compared to the 0.5% with a savings account (if you are lucky).

Looking long-term

It is certainly the case that we are starting to see an exodus of the ‘amateur landlord’, leaving more professional landlords who see ‘landlord-ing’ as a business, not a game. Those long-term Portsmouth landlords can see through the present predicament as they have a long-term buy-to-let investment mindset.

Many Portsmouth landlords are intensely aware that demand for high-quality private rental properties in Portsmouth is only going to flourish as a consequence of the pandemic; whilst not forgetting that demand presently exceeds supply. Also, those same Portsmouth landlords know that a responsible approach to their tenants with regard to condition and repairs is a key to ensuring the rent keeps flowing in with minimal void periods.

Finally, even though Portsmouth house prices are, on average, on the up, there are still some bargains even in this market. By doing their homework and working with an agent like NEXA, these savvy Portsmouth landlords are paying reasonable prices, thus giving them a sturdier rental yield and the ability for future capital growth.

Our property experts are here to help and guide landlords on their long-term investment strategy. If you’d like to find out how we can support you, contact us today on hello@nexaproperties.com or call our friendly team on 02392 295046.