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A new way to get 6pc from buy-to-let


A new way to get 6pc from buy-to-let

Specialist buy-to-let lender Paragon is raising a further tranche of cash - and offering investors in its bonds 6pc returns

Annual house price growth nudges upwards as mortgage lending and demand grows according to the ONS and CML.
Money in bricks and mortar: Paragon is a buy-to-let lender offering investors 6% returns - but no property is involved. Photo: Alamy

Buy-to-let specialist lender Paragon is offering a 6pc return with its latest retail bond, the third it has launched since 2013.

The offer period is now open and is expected to close on 24 August. The bond will mature on 28 August 2024.

Paragon, which encompasses a buy-to-let lender and a challenger savings bank, has already attracted £185m from income-hungry investors and savers with two previous retail bond issues.

In February 2013 it offered savers 6pc and the rate increased for the second launch, in January last year, to 6.125pc.

Like those bonds, the latest Paragon offering will be listed on the Order Book for Retail Bonds (ORB), via the London Stock Exchange.

The bonds have a minimum initial subscription amount of £2,000 and are available in multiples of £100 thereafter.


What are the risks?

This is not a savings account and, as such, there is no protection under the Financial Services Compensation Scheme. The scheme protects £85,000 of a savers money deposits if a bank goes bust. The limit falls to £75,000 next year.

The risk to anyone buying the bond is that Paragon runs into difficulty and cannot honour its promise to pay coupons and return capital.

Paragon is big enough to feature in the FTSE 250 Index of companies. Recent results showed 11pc growth in operating profits thanks to a strong recovery in its buy-to-let lending business.

A possible headwind for the company is the limiting of tax relief on mortgage payments to the basic rate of income tax, announced in last month’s Summer Budget. How much this will deter further borrowing and investing by landlords is as yet unclear.

If you hold the bonds to maturity, you do not have to worry about movement in the price. If, however, you wish to cash in at any point before that you will have to take the price determined by the market.

As with other types of investment bonds – gilts and corporate bonds – prices will fall if interest rates begin to rise.

The previous Paragon bonds have risen in price during a period when bonds in general have looked attractive versus the ultra-low returns on cash. It is widely expected that rates will begin to rise soon and this is already having a negative effect on bonds prices.

Higher inflation, too, erodes the value of a bond.

Why not buy the previous bonds from the market?

The previous Paragon retail bonds have risen in price, as shown in the table. That has pushed the yield available to those buying now lower.

Additionally, anyone buying them and holding them to maturity stands to lose part of their capital because Paragon will return the ‘par’ value of £100 for each bond, rather than the higher price currently being demanded.

That makes the yield on the new issue of ther retail bond attractive versus its forerunners.

What £10,000 invested now will get you

Years to maturity
Current price (£)
Yield (%)
Capital returned at maturity (£)
Paragon 6% 2024 (new issue)
Paragon 6.125% 2022 (issued Jan 2014)
Paragon 6% 2020 (issued Feb 2013)

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