A recent report shows how buy-to-let has produced excellent returns of over 1,200% since 1996.
On the 18th anniversary of the buy-to-let mortgage initiative, mortgage lenders including Paragon Mortgages and Association of Residential Letting Agents (ARLA) have commissioned a major report on how buy-to-let investors who bought in 1996 have fared compared to other types of investment.
The main findings are that buy-to-let has shown to be the most outstanding investment during the last 18 years, and has provided average returns that outstrip other types of investment.
The report shows that someone purchasing a buy to let property in the final quarter of 1996, and taking out a mortgage based on a 75% loan-to-value then for every £1,000 invested this would now be worth over £13,000 at the end of 2013. This gives a compound annual return of 16.3%.
Over the same 18 year period an identical investment in other assets would have grown as follows:
• Cash to £1,900
• UK equities (shares) to over £3,o00
• (UK government bonds) gilts over £2,900
• UK commercial property £3,500
Included in the buy to let mortgage breakdown then (32%) around a third of the total return would be income (rent less costs), and the rest a whopping 68% capital gain.
Alternatively someone buying a buy to let entirely with cash would have seen each initial £1,000 invested growing to over £4,700 resulting in a compound annual return of 9.7% to the end of 2013.
The report also includes a further projection over 10 years for buy to let returns which assume house prices will rise by 4% a year and rents will increase by 2% a year and further that by 2020 mortgage rates will rise to 5.75%.
The example projections further suggest that for a 75% mortgage then every £1,000 invested at the end of 2013 would be worth over £2,900 in 10 years time. This would give an annual return of around 11.3%.
The return for a cash buyer over the same period would be lower at only 6.3%, which would be similar to returns for other types of investments such as gilts and equities which returned around 6>3% between 1996 and 2013.
Based on these projections being correct then clearly the reputation of buy to let property should be looked on as a superior investment.
The director of research at the Wriglesworth Consultancy, Rob Thomas, said: “We believe that this report is a detailed analysis of long term returns from buy-to-let undertaken to date. The report will be invaluable for buy to let investors looking to understand the variable performance of different types of investments over the long to medium term”.
The report also highlights the outstanding average returns that savvy buy-to-let investors have benefited from over the past 18 years.
The director of mortgages at Paragon, John Heron, said: “Buy-to-let mortgages have over the last 10 to 15 years become such a significant feature of today’s mortgage market that we tend to forget that these products did not exist before 1996.
The buy-to-let market either for cash purchases or with the help of a mortgage has dramatically increased the number of properties which are now available to rent in the UK.
These investments in property are now providing over 4 million homes which are available to rent. The private rented sector is currently an important part of the UK’s housing market and continues to grow and provide healthy returns.
Given the latest budget announcement which stated that from 2015 on anyone retiring would be entitled to withdraw their whole pension as one lump sum then this type of investment will clearly be near the top of their list”.