I read an interesting article the other day about negative equity and how up to 40% of landlords could face themselves in this situation by the middle of next year.
Standard and Poor’s Rating Service stated that between 20%-40% of buy-to-let borrowers may owe more on their mortgage than their house is worth if prices fall between 25%-35% from their peak.
With most property investors geared around the 80%-85% mark following the recent boom years, this may indeed by true.
Furthermore, they also commented that following a review of 200,000 securitised buy-to-let loans, there arrears were running at 3.7% to the end of June verses 2.9% for prime mortgages to owner-occupiers.
But lets not get depressed right now because there are several issues at play here.
- If you buying your properties with a healthy discount to the market value, then you are already locking in any downturn in the market. So, it doesn’t matter if the market crashes by 20% if you have a seriously good margin already locked in – if you don’t then you may have some issues on paper. However, this goes onto my next point.
- It doesn’t really matter if you are in negative equity because property is a LONG-TERM investment. The days of making a quick £20K profit from doing a quick refurb and selling it on have ended. Its been proven by many commentators, experts, pundits and statistical evidence that long-term, property prices keep on rising.
- Cashflow is king. I talk about this all the time but you need to be investing for cashflow NOT capital appreciation. If you have 10 houses making £500 pcm gross cashflow;, then do you really care if you are paying more for the house than its worth? No, because cash is what pays the bills not capital appreciation.
- If you are on a tracker, then potentially you might owe more on the mortgage than the value of the property but you’ll still be saving money because of the recent rate reductions. I have a new-build property which I purchased for £340,995 a few years ago. Given that I had a larger new-build valued in May for £40K less, I doubt that my property is worth anywhere near £340,995. However, do I care? Not a hoot really – I make around £336.58 gross cashflow from this property and come January, my mortgage payments drop by another £200 per month.
- According to the British Bankers Association, buy-to-let lending in September was £3.2 billion up from £2.8 billion in August. This upturn is good news for property buyers everywhere as it will strengthen the market and start to build-back demand and prices again.
To sign-up for my exclusive 10-part ecourse on building your own successful HMO business which gives you massive cashflow every month, please sign-up today in the opt-in box at the top of the page.