Borrowing money to invest may be risky

Kieron Bassett.
Kieron Bassett.
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If you borrowed money to buy shares you may be considered to be a bit reckless.

But borrowing money to help fund a buy to let property is considered by many to be low risk, but is this true?

If you borrowed £70,000 on a £100,000 property at a 4.5 per cent fixed rate over five years it would cost you £15,750, on an interest only basis, and if we then added a further £2,500 initial costs for arrangement fees, solicitors fees, administration charges and statutory expenses, the total cost over five years would be £18,250.

This figure could be offset by rent coming in and if I consider that £575 per month would be reasonable and deduct 10 per cent for agents fees, 20 per cent for voids and repairs then approximately £5,000 per year net would be received, that translates to £25,000 over five years.

In addition a property in Morecambe according to house price website Zoopla has risen by 6.67 per cent in total over the last five years, so a further £6,670 could be added to the £25,000 to bring in a gain of £31,670.

The £31,670 gain would then be set off against the £18,250 costs giving a pre tax paper gain of £13,420 or 13.42 per cent over the five years.

Whereas if we take the same costs of £18,250 for borrowing and initial fees in a balanced managed fund, over five years the return totals 34.5 per cent at May 2015. So taking the £34,500 gain and deducting £18,250 the gain would be 16.25 per cent, a higher return than the buy to let mortgage over the last five years.

Also the returns for the buy to let would plummet further if you decided to sell after five years with more estate agents and solicitors fees to pay, whereas the average balanced managed fund would have no fees to sell the fund.

However, even with all the evidence above to indicate that maybe buy to let isn’t the road to riches when compared to other investments over the last five years, the human factor kicks in and we naturally feel more comfortable with property as an investment.

Generally I would not borrow money to invest in any way before taking advice as there is a good chance it may not be right for you.