Mortgage calculator: is it better to rent or buy?

The irony of lower house prices is that the prime beneficiaries are not people who want to get on to the ladder, as you might expect, but those who have already reached the top and have paid off their own mortgage.

First-time buyers remain constrained by a lack of mortgage options and by an inability to save a deposit quickly enough. However, Hometrack estimates that there are at least eight million households that have either no mortgage, or one that is less than 50 per cent of the value of their home - and it is such low-debt individuals who are now investing in property.

So great is the desire to take advantage of the buying opportunity represented by current prices - now down to 2004 levels - that some homeowners are even considering remortgaging their own homes so that they might buy a smaller property in cash. London & Country, the mortgage broker, has received an increase in the number of inquiries from owners wanting to convert their existing equity to buy. The majority are already buy-to-let landlords (although some are amateurs) who now see potential for a good rental yield - the proportion of rent received in relation to the purchase price. A yield above 5 per cent is good enough to convince many, says Yolande Barnes, of Savills.

Also included in this new cash-buyer set are people who sold bigger properties, downsized and now wish to invest the leftover equity in property rather than leave it stagnating in building society accounts. In this group is Antonio Recchia, 48, who downsized last March and has since invested the remaining £140,000 equity in three buy-to-let properties inNewark-on-Trent and Cotgrave, Nottinghamshire. Recchia, an electrical engineer, beat several other cash buyers to secure his most recent purchase, a repossessed three-bed end-of-terrace in Newark, costing £71,000. Recchia says that he decided to invest partly because of lower house prices and partly because of the poor return on savings accounts. His latest purchase needs renovating but he thinks that it will then rent for £495 a month. “It's in a lettable location, within walking distance of both Newark train stations.”

David Hollingworth, of London & Country, has detected a preference among investors for three-bed semi-detached or terraced properties rather than one or two-bed flats. This is because lenders view smaller homes, especially new-build, with suspicion, so investors are adopting a similar risk-averse strategy.

David Sandeman, managing director of Eigroup, the auction group, says that cash buyers account for the bulk of purchasers in auction rooms. “People who need big mortgages do not buy at auction,” he says. “Only those who can produce the funds quickly do well.” He says that everything and anything is selling to these cash-rich investors. “Cash buyers will only snap things up if they think the reserve is realistic, which is now happening,” Sandeman adds.

At the top end of the market, even properties worth £3.5million are being sold to those with enough ready money to pay 100percent upfront, as long as they get a discount of at least 20 per cent. Philip Selway, managing partner of The Buying Solution, an agent that finds homes for buyers, says that Middle-Eastern and Greek investors are stumping up enough sterling to buy homes in London worth £1.5 million to £3.5 million outright. In the country, cash buyers are discreetly purchasing sporting estates “off-market”, while in the Home Counties those bankers who are still earning enough to pay cash continue to dominate the market, Selway says. But they are not putting all their money into property. As he says: “We think those that are paying in cash have yet more to spend, but are choosing not to spend all of it right now.”

— "If you've got some cash, there are some very interesting opportunities around. Repossessions have been significant - that's where you pick up the best deals." Nick Leslau, chairman of Prestbury Investment Holdings

— "Buyers pay us a £2,500 retainer for finding suitable properties - they would not do that if they weren't serious." Philip Selway, managing partner, The Buying Solution

— "People are asking us how they might remortgage their own home so they can buy somewhere else outright." David Hollingworth, London & Country, the mortgage broker

— "One seasoned investor bought four properties from us in February." Jayne Shelley, Winkworth estate agents, Sheffield City capital

City capital

It is an unlikely time to market an overseas property investment fund, but one, the Rocksure Capital fund, is selling itself as a way of spreading risk and part- owning a bolt hole in a European capital city. Investors collectively buy ten homes outright in ten different cities that they can then use for a number of weeks a year, depending on how much is invested. The fund is made up of 180 “units”, each worth £100,000. Investors can put in anything from £50,000. The properties will be sold after ten years, when the profits are split. But financial advisers are wary. Mick Gilligan, partner at Killik & Co, the stockbroker, says: “The problem with funds like this is that they are not easily traceable. You are locked in for ten years. It is not a quoted share or unit trust so you would have to do a lot of homework to check how safe it is. You would be better off buying your own holiday home.”

Kasia Maciejowska

rocksureproperty.com

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