Should you join the rush back to buy-to-let?

Buy-to-let investors are once again competing with homebuyers in UK cities. Should you join them, or are we seeing the start of a new bubble mentality?

Would you buy a property you haven't seen? I wouldn't, and I think most MoneyWeek readers wouldn't either.

But others would. "Buy-to-let investors are increasingly buying properties that won't be completed for many months if not years," says Claire Carponen in The Times. And that's not just the case in central London. Even in Manchester which only a few years ago was awash with unwanted two-bedroom new-builds there is a severe shortage of stock: "there are only 39 new-builds available to buy in Manchester city centre."

Add in the fact that rising house prices have allowed investors to once again start withdrawing equity from old purchases to finance new ones, alongside the new rise in the availability of high loan-to-value buy-to-let mortgages, and you begin to see why buy-to-let investors are once again "competing with homebuyers" in UK cities. However, take a closer look and you might begin to think you see something else a new bubble mentality.

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According to the Financial Times, "more investors are now turning to the buy-to-let market for capital growth instead of income". With rental yields in many places too low to justify purchases (the national average is 5.2% but yields in London are well below that), the "motivation to invest" has changed. There is nothing wrong with looking to make capital gains. But these two things together make us a little nervous. Buying off-plan comes with particular risks if the price falls after you have paid your deposit but before you complete, you will find yourself paying more for the property than it is worth. Worse, you may find you can't get a mortgage on it and you lose your deposit (as happened to a good many people in 2008).

Buying just for capital gain comes with risk too: one thing that makes property a sustainable investment is the idea that your yield at least covers all your costs. If that isn't happening and prices then fall you don't have a long-term asset, you have a long-term liability. With interest rates at 300-year lows, there is no reason to worry about all this in the short-term.

But if you are going to join the new market frenzy, do at least give yourself some medium-term protection by getting the cheapest possible mortgage. The best available at the moment, says The Times, include Principality Building Society's two-year tracker. You need a 40% deposit for this (the loan to value is 60%), but the rate is a mere 1.99% (rising to 4.99% after the two years). Otherwise, The Mortgage Works has a similar 60% loan to value deal at 2.49% and, for those with a smaller deposit, Accord Mortgages has one at 2.69% rising to 5.99%.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.