Could your Gloucester property save you from Pension oblivion?

If you were born in the early 1970’s or late 1960’s, if you haven’t started to think about it yet, retirement is closer than you think. In fact the number of years you have left to work is less than the number of years you have worked. The basic state pension is worth £115.95 a week for a single person in 2015/16 (or £6,029 a year) and £231.90 a week for a couple (£12,118 a year) .

As a household, could you live on just over £12k a year?

However, could the property you are living in save you from poverty when you reach retirement? You see, a regular income is vital in retirement, and the bricks and mortar you own in Gloucester could provide a way for you to finance life when you retire.

If you are in your 30’s, instead of saddling yourself with bigger and bigger mortgages, going from your first time buyer flat, to a terraced, to the semi and then the large detached house, you could instead keep your terraced or small semi, turning it into buy a buy to let property, let the rent pay the mortgage and then rely on capital growth to provide you with a lump sum when you sell the property and retire.  One of the biggest plus points of buy to let is what is known as leverage. Let me explain ... say you have a deposit of 25% and the value of the property rises by 3% a year, your gains in fact multiply to 12%.  However, if property prices drop, 'leverage' can be catastrophic, as losses will also be multiplied. Property values have dropped a number of times in the last 50 years, but they always seem to bounce back ... property must be seen as a long term investment.

Let me explain how leverage could work for you. If you had bought a Gloucester house in Spring of 1983 for £30,000, using a 75% mortgage and 25% deposit, (meaning your deposit would be £7,500). Today, that Gloucester property would have risen in value to £193,173, a rise of 543.9%. However, when you look at the growth on just your deposit, the rise is even better ... instead of 543.9%, we see a rise of 2476% (remembering that the mortgage would have been paid off).

However, buy to let is not all about capital growth and in retirement, income is more important than capital growth, as rent is the key to a steady income.

So surely the best strategy is to buy those Gloucester properties with the high rents (when compared to the value of the property). These are called high yield properties in the buy to let world because the monthly return is so much greater. So surely they are the best in Gloucester? Possibly, but the properties that offer these higher yields (in the order of 5% to 6% per year) tend to be in “ not so nice areas “ of  Gloucester, historically they haven’t offered such good capital growth when compared to the city average, and have a higher tendency for void periods and such properties tend to attract tenants that have a greater propensity to be high maintenance.

Therefore, if a high maintenance rental portfolio wasn’t for you, another strategy could be buy a property with relatively smaller rental returns of 4% to 5% per year (i.e. lower yields), but in a more up market area . Properties such as these tend to suffer from less void periods (i.e. when there is no tenant in the property paying you rent) and they historically have had better long term capital growth when compared to the city average.

Every landlord is different and every property is different. All I suggest to you is do your homework. I am always happy to give advise and would be more than happy to talk to you.

Gloucester's £1.6 Billion Mortgage Timebomb

Eight years ago, in the summer of 2007, hardly anyone had heard of the term ‘credit crunch’, but now the expression has entered our daily language and even the Oxford Dictionary.  It took a few months throughout the autumn of 2007, before the crunch started to hit the Gloucester Property market, but in November / December 2007, and for the following seventeen months, Gloucester property values dropped each and every month like the proverbial stone. The Bank of England soon realised in the late summer of 2008 that the British economy was stalling under the continued pressure of the Credit Crunch. Therefore, between October 2008 and March 2009, interest rates dropped six times in six months from 5% to 0.5% to try and stimulate the British economy. 

Thankfully, after a period of stagnation, the Gloucester property market started to recover slowly in 2011, but really took off strongly in late 2013 / early 2014 as property prices started to rocket. However, the heat was taken out of the market in late 2014/early 2015, with the new mortgage lending rules and some uncertainty, when some people had a dose of pre–election nerves.  

With the Conservatives having been re-elected in May, the Gloucester property market regained its composure and in fact, there has been some ferocious competition among mortgage lenders, which has driven mortgage rates to record lows. However these record low interest rates cannot continue forever and they will go up. In the past it was not the first rate rise that was the catalyst for many homeowners and landlords to remortgage but the second or third increase.  The reason being that it was only by the time of the third rate rise, it started to hit the wallet.  However, the issue is, by the time of the second or third rate rise the best fixed rates are no longer available as they had been pulled by the banks months before.

But here is the good news for Gloucester homeowners and landlords, over the last few months a mortgage price war has broken out between lenders, with many slashing the rates on their deals to the lowest they have ever offered.  I read that the well respected UK financial website Moneyfacts said only a few of weeks ago, the average two year fixed rate mortgage has fallen from 3.6% twelve months ago to just under 2.8%.

Interestingly, according to the Council of Mortgage Lenders, the level of mortgage lending had soared to a seven year high in the UK.  So what about Gloucester?  In Gloucester, if you added up everyone’s mortgage, it would total £1.6 billion.  Even more interesting is when we look at Gloucester and split it down into the individual areas of the city,

• GL1 - Central Gloucester £354.3m
• GL2 -   Arlingham, Cambridge, Churcham, Churchdown, Down Hatherley, Elmore, Framilode, Frampton on Severn, Hardwicke, Hempsted, Highnam, Longford, Longlevens, Longney, Maisemore, Minsterworth, Moreton Valence, Norton, Over, Podsmead, Priors Norton, Quedgeley, Rudford, Sandhurst, Saul, Slimbridge, Tibberton, Twigworth, Walham, Waterwells Business Park, Whitminster £883.5m
• GL3- Barnwood, Brockworth, Churchdown, Coopers Hill, Great Witcombe, Hucclecote, Innsworth, Little Witcombe, Witcombe  £427.7m

Since 1971, the average interest rate has been 7.93%, making the current 0.5% very low.  So, if interest rates were to rise by only 2%, according to my research, the 12,337 Gloucester homeowners, who have a variable rate mortgage would, combined, have to pay an approximate additional £18,240,000 a year in mortgage payments.  That means every Gloucester homeowner with a variable rate mortgage, will on average have to pay an additional £1,478 a year or £123 a month in interest payments.

I know over the last couple of posts, I have talked about mortgages a lot however, I am not a mortgage arranger but a letting agent and as regular readers know, I always talk about what I consider to be the most important issues when it comes to the Gloucester Property market and at the moment, in my humble opinion, this is the most important thing!

Crisis in the Cheltenham Property Market ..probably

I don’t know about you, but if you watch Sky News every waking hour or read the newspapers, it always seems we as a Country, Europe or the World seem to lurch from one crisis to another. Another week, another crisis averted. It was only last summer the doommongers were predicting the end of the world over the supposed house price bubble that many believed was developing in the South. Property prices were rising at 20%+ per annum in London, only for things to ease as the property market in the capital showed a controlled slowdown and cooling in activity with price growth easing to a more realistic 8% to 9% per annum. Interestingly, there was no panic when some modest price drops were seen in some of London’s highest priced suburbs.

However, the latest  crisis is the buy to let boom and as George Osborne always likes to be topical, in the July emergency budget, he declared that he will start to scale back, from 2017, the tax relief that those high income tax rate landlords with a mortgage have benefited from. The Daily Mail ran headlines stating it was the end of the private landlord; predicting many landlords will give up on buy to let altogether and we will be inundated with rental properties up for sale as landlords feel squeezed from the market.

Even the Governor of the Bank of England, recently cautioned that the buy to let property market could destabilise the whole UK property market. He was concerned landlords who bought with high loan to value mortgages could be spooked if there is a property crash, they would panic because of negative equity, sell cheaply, which would worsen house price falls.

End of the world then?   .. this week, yes probably, but next week .. that’s another story!  Before we all go and live like a hermit in the Scottish highlands, let me explain to you my perspective on the whole subject. Two thirds of buy to let properties bought in the last eight years have been bought mortgage free – so they won’t be affected by the Chancellors’ tax changes.  Also, something I feel is often overlooked but very important, is the fact that landlords historically have only been able to normally borrow up to 75% of the value of the rental property.  In the last property crash of 2008, property values dropped by the not so insignificant figure of 18.47% in Cheltenham, but even then, when we had the credit crunch and the world’s banking sector was on the brink, no landlord would have been in negative equity in Cheltenham.

I believe we have a case of ‘bad news selling newspapers’ and I believe that buy to let, and the property market as a whole, will carry on relatively intact. It’s true reducing tax relief will hit landlords who pay the higher rate of income tax and this may slightly diminish buy to let as an investment vehicle but I doubt people will sell. Many landlords have been lazy with their investments, buying with their heart, not their head. You would never dream of investing in the stock market without doing your homework and talking to people in the know. If you want to make money in the Cheltenham property market as a buy to let landlord, it’s all about having the right property and as you grow, the right portfolio mix to offer a balanced investment that will give you both yield and capital growth.