Changing Shape of Buy to Let
New legislation from April 2016 will potentially change the shape of buy to let as an investment opportunity.
A “Hot” Market
Buy to let has become one of the hottest investment areas with mortgages to landlords accounting for about 17% of all new lending in 2015, according to the Council of Mortgage Lenders, which is up from around 12% in the first half of 2008.
Buy to let lending is also growing faster than other areas, with the value of loans agreed in the first three quarters of 2015 up almost 50% on the same period in 2014 compared with an increase of just 5.3% for loans to owner occupiers over the same period.
Buy to let investment has been stimulated by cheap loans and rising rents as the housing shortage and market recovery (the average house price is up 38% over the past 10 years according to the Halifax House Price Index) has priced more and more potential buyers out of the market and into rented homes.
Following concerns expressed by the Bank of England Financial Policy Committee that highlighted the buy to let sector as a potential risk to the economy as a whole the Government has introduced new legislation from April designed to slow down the sector.
The following four important legislation changes are being introduced each of which will potentially increase costs and perhaps change the shape of the buy to let sector.
The current position whereby tax relief on the interest on mortgages used to buy rental property is available at the highest marginal rate will be gradually reduced until by 2020 relief will be restricted to 20%. This means that for anyone paying tax at the highest rate of 55% and funding a buy to let mortgage with an interest only mortgage the effective financing cost will rise from 45% of the interest charge to 80% in four years.
The wear and tear allowance, which permitted landlords of furnished properties to claim tax relief of 10% of the rent received every year, will now end and from this April landlords will only be able to deduct actual expenditure on refurbishment against their rental income.
Those purchasing buy to let properties and second homes will have to pay an additional 3% of Stamp Duty from this April.
The Government is planning to apply Capital Gains Tax to buy to let investments within 30 days of sale (this is currently under consultation but is scheduled to take effect in 2019).
The National Landlords Association has warned that half a million properties could be dumped on the housing market over the next 12 months in response to the Chancellor’s plans
Richard Lambert, Chief Executive Officer of the National Landlords Association, said: ‘Two speeches from the Chancellor in 2015 have led to a crisis in confidence greater than when all but a few BTL products were immediately withdrawn from the market following the 2007 financial crash.
‘But there is no guarantee that these will be the one or two-bedroom flats or small houses that will appeal to first time buyers, especially as landlords are more likely to offload less desirable stock in less desirable areas.
‘We’ve always said that Mr. Osborne is blinded to the impact of his decisions by his commitment to homeownership.
‘He may have intended to focus on the small-scale part-time investor, but it’s the larger and more professional landlords who will be hit worst by cuts to mortgage tax relief and increases to stamp duty, and who appear most likely to leave the sector.
‘What happens to the people these landlords house if they still can’t buy and there are fewer and fewer properties available to rent?’
Despite the alarmist views of Richard Lambert for many, particularly for those with enough money to raise a decent size deposit, buy-to-let continues to look an attractive income investment especially when compared to low savings rates and stock market volatility.
The property market bouncing back has also encouraged more investors to snap up property in the hope of its value rising.
Record low mortgage rates are helping buy-to-let investors make deals stack up, particularly as it’s now possible to fix a mortgage for five years at just over 3 per cent at the biggest deposit level.
There is of course a need for caution as rates will rise eventually – and recent history provides an important lesson in how returns can be eaten into as many investors who bought in the boom years before 2007 struggled as mortgage rates rose.
Despite the potential for costs to rise a combination of more tenants in the market, rising rents and improving mortgage deals continue to tempt investors into the market.
Buy to Let Some Basic Principles
Research the market
Particularly if you are new to buy-to-let, consider the risks, as well as the benefits and be sure that buy-to-let is the investment you want as your net investment may be able to perform better elsewhere.
Property investing has paid off handsomely for many people, both in terms of income and capital gains, but it is essential that you go into it with your eyes wide open, acknowledging the potential disadvantages as well as the advantages.
The more knowledge you have and the more research you do, the better the chance of your investment paying off.
Buy-to-let rates have never been more competitive but beware of high fees which can push up the cost of a mortgage.
Choose an area where people would like to live
Consider areas which have good transport; highly rated schools; student accommodation and are close to industry, commerce, hospitals etc.
Match the kind of property you can afford with locations that people who would want to live in those homes would choose.
This is not overly simplistic it is probably the most important aspect of a successful buy-to-let investment.
Work out your monthly payments
Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments and many now demand a minimum of a 25% deposit. The best rate buy-to-let mortgages also come with large arrangement fees.
Once the mortgage cost, potential rents, maintenance costs and tax deductions are known a clinical decision must be taken about whether the investment works out. If it does then factor in the financial breakeven point allowing for possible dormant rental periods and potential mortgage rate increases.
Get the best mortgage
Do your own research so that you are armed with as much basic knowledge as possible but it really does pay to speak to a good independent broker when looking for a buy-to-let mortgage. Not only will they talk you through the whole process including what various deals are available but will also help ensure that you select the option that is the right one for you.
Identify your target tenant
Who do you want them to be and what are they likely to want?
Some examples; students will want something easy to clean and comfortable but not luxurious – but do you want to rent to students? Young professionals may want modern and stylish but not overbearing. A family will have plenty of their own belongings and need a blank canvas.
Finding a “good” tenant is essential so again it really pays to use a professional agent to ensure that the correct investigations are undertaken. It is also possible to take out an insurance policy against your tenant failing to pay the rent.
Invest for rental yield
Great though house price rises are a buy to let investment is best treated as a long term investment rather than a short-term capital growth and therefore rent should be the key return.
Negotiate the best price
As a buy-to-let investor who is not reliant on selling a property to buy another you have the same advantage as a first-time buyer when it comes to negotiating a discount.
Using a buying agent can give you a major advantage because they will know the market and will be able to negotiate the best price.
Buy to Let – Consider how hands-on you want to be
Buying a property for buy to let is just the first step.
Will you find your own tenants and manage the property yourself or use an agent to do so?
Although agents will charge you a fee for finding a tenant and managing the property they will ensure that you have the best chance of finding the “right” tenant; regularly monitor the property and deal with any maintenance problems.
To get the best possible returns every element of your investment lifecycle needs to deliver. That’s why we stay with you through each step helping you plan, source, acquire, let, manage and sell your property. For more information call 0845 3881 369 or email [email protected] or [email protected]