Cash buyers have been securing greater discounts in the UK property market, and this has coincided with a rise in mortgage-free landlords.
With rental yields hitting a 13-year high for UK buy-to-let, the sector continues to secure strong returns for landlords. In particular, those with lower levels of borrowing will have felt the gains to a greater extent as average mortgage rates remain higher than pre-2022.
In times of higher mortgage rates, those who can afford to buy without a mortgage can not only save money through avoiding borrowing costs and fees, but tend to be able to secure a discount on the purchase price. For the seller, cash buyers can offer a faster, more hassle-free sale than mortgaged ones, making them more likely to accept a lower price.
Research earlier this year by MPowered Mortgages found that cash buyers were paying an average of £28,189 less than a mortgaged buyer on the equivalent property – shaving 9.3% off the price. In the North West, this discount increased to a huge 13.4%, while in other parts of the country there was less disparity.
In buy-to-let, there tends to be more cash buyers than in the wider housing market, as landlords can not only get better deals on the property, but there is also more of a focus on maximising overall returns, with additional expenditure such as mortgage borrowing being avoided where possible.
Cash buyers market “robust”
Housing market activity overall has been “resilient” according to the latest house price index report from Nationwide, including a “noticeable pick up” in the second half of last year in terms of transaction levels. So far this year, all aspects of the market have been moving in a more positive direction.
The report also notes that cash transactions were “particularly robust”, with activity for cash buyers sitting 2% higher than pre-pandemic levels. Again, this is most likely linked to the fact that borrowing costs are several percentage points higher than pre-2020, pushing more buyers to opt for mortgage-free purchases.
The past 12 months has also seen a gradual increase in the number of buy-to-let purchases involving a mortgage, according to Nationwide, indicating a more buoyant and optimistic market thanks to a strong rental market coupled with falling mortgage rates.
At the same time, the report said: “It is important to note that some cash purchases are also undertaken by landlords and that activity in this space appears to have remained more buoyant.”
Buy-to-let: cash vs mortgage
There are pros and cons to investing in buy-to-let property using cash only, versus taking out a buy-to-let mortgage against the property. Choosing the best option will depend on your individual circumstances and long-term goals, and landlords are advised to speak to a professional before making a decision.
As mentioned above, cash buyers can often secure a discount on a property compared with when buying with a mortgage, which can provide an instant boost to potential return on investment.
Taking out a mortgage also adds to the cost, with buy-to-let mortgages tending to require a greater deposit than standard residential ones, alongside any additional mortgage fees. With no monthly borrowing costs, a greater chunk of the gross annual rental yield can be kept as profit.
However, for some landlords, investing using a buy-to-let mortgage can enable them to diversify their portfolio – rather than injecting £100,000 into one cheaper property, borrowing could enable the landlord to invest in two properties, spreading the risk and securing a dual income stream.
Recent research from Moneyfactscompare has also revealed that buy-to-let mortgage availability is currently at a record-high, with a total of 3,560 products on the market. This boost in choice creates more flexibility for landlords seeking buy-to-let mortgages, making it easier to find a product tailored to their circumstances.
Mortgage rates also remain cheaper than they were a year ago, with most forecasts pointing to rates coming down over the course of this year. This is expected to entice a greater number of landlord borrowers to the market – while cash buyers are still likely to invest thanks to the strength of the UK rental market.
