How can 13,862 Oxford savers protect themselves from low interest rates?

The financial correspondents of many National newspapers are speculating that interest rates will stay low well into the early 2020’s.  The yield on 10-year Government bonds is currently around 0.61 per cent indicating that the banks, pension funds and institutional investors believe that the Bank of England’s base rate will on average be below 0.61% over the next ten years (i.e. the rate at which they are buying the 10 year bonds)

For those who have savings (with many depending on them to supplement their pensions) are looking for ways to improve their returns, and protect their capital, investing their savings in property is an attractive option. A simple search of the internet suggests that the best savings rate available is a 5-year fixed rate at 2.5% a year. A £300,000 nest egg would earn you £7,500 a year and even then only if the capital was left undisturbed. However, Oxford property prices and buy to let yields combine to make property investment in Oxford an appealing alternative investment. The Average Yield (the investment return) over the last five years for Oxford buy to let property has been just over 5% per annum and average property values in over the same period have risen by 28.6%.

Using these averages, the saver with £300,000 to invest in Oxford property, would have capital appreciation of £85,800 over 5 years and receive an average gross rental income of £15,900 per annum.  But investing in property seems a daunting prospect for many people, who may worry that they don’t really have the expertise to choose the right property, and don’t have the capability to manage the process of finding tenants, managing the maintenance and collecting rent.  Then there’s the stamp duty to pay on the house purchase (£9,000 on a purchase of £300,000 as a buy to let), and the need to submit extra detail on a tax return (perhaps £750 per annum for an accountant).  For property owners who don’t want to manage the property themselves, a letting agent will want up to 12% of the rental returns per annum to undertake the management. And, of course there is maintenance of the property to protect the asset value at say 7.5% of the gross rent.   Assuming the investor sells the property at the end of Year 5 there would also be estate agency fees for the sale. But even with these complications, the net returns available enormous compared to the best 5-year savings rate available.

The total net return on investment (i.e. after all of the costs have been taken into account) is £132,600.  When compared to the best 5-year savings rate I could find which would provide a net return of just under £40,000.  That a return that is over 3 times what is likely to be achieved by saving money in a bank or building society account. 

As with any investment there are risks as well as benefits to buy to let investment. For example, investing in rental property means locking up capital in an asset that may fall or stagnate in value. There could be periods where the property stands empty waiting for new tenants to be found (called a VOID in the property industry).  But with advice from the right property agent, and with a willingness to take a medium to long-term view, most of the risks can be off-set.  And, with interest ratss so low, and set to continue to be low over the coming 5 years, the return from the right property investment more than off-set the risks involved.