Many people turn to property investment as a way of saving for their retirement. An example of a landlord’s life story could be to buy their first home to live in, around their 20s, perhaps sell that and move into their next home in their 30s, then sell that and move into the home they will retire in when they are in their 40s. Once they are living comfortably in that home, this is when they begin to build a portfolio of let properties, by going through the cycle of saving a deposit and then buying an investment property. In this example the landlord has only lived in three properties, although in reality, the average is higher than this.
Now let’s look at an alternative for people who like to plan ahead, have a strong level of income and have the financial discipline to pull it off. You buy your first home and stretch the mortgage over as long as possible in order to lower your monthly repayments. Then you use the savings this stretched mortgage term gives you, plus whatever else you can afford to put aside, in order to save a deposit for your next home. Once you have saved enough, you ask permission from your current lender, to rent out your existing property, so that you can obtain a mortgage on another property, be aware, there is no guarantee they will agree to do this. Then once you are in your second home, repeat the process until you are in your final home.
This method will take you longer to make steps up the property ladder and with no guarantee your current lender will give you permission to rent out your existing property, you may need to change your plans part way through.
The upsides to this method include never having to wait for somebody to buy your home, no matter how illiquid the housing market is when you come to move, never having to fully say goodbye to a property which may carry sentimental value, and most importantly the cost savings.
Using this idea, four transactions are cut out of the equation from the first example. The sale of home’s 1 and 2 and the purchase of two investment properties. So that’s four lots of solicitors fees, two estate agent’s selling fees, two valuation fees and two buy-to-let mortgage arrangement fees, which can be considerably higher than standard arrangement fees. Altogether the savings work out somewhere in the region of £7,000 to £13,000. Plus, if any of the investment properties you buy are above the stamp duty threshold, you will save thousands of pounds there too.
This is only a very basic example, and if you start looking into the effect of house price inflation and rents received, it becomes a very messy calculation, but one which could go either way depending on timing and other factors.
There are lots of variations of this idea being done regularly. For example, during the slowly moving property markets many people were forced to remortgage their properties using a let-to-buy mortgage in order raise a deposit to move on to their next home.
If you are willing to try something a bit different it is worth consulting with a mortgage adviser so that you can explore the different options and see if there are any that are possible for you.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Jason Hinde DipPFS
14th October 2013
“