As a nation, we’ve been obsessed with owning property for decades. Purchasing a tangible, solid brick and mortar asset wasn’t just better than renting a home – it was also viewed as a sound investment. But, just recently, life has become especially challenging for Buy to Let landlords.
House prices have stagnated, partly thanks to the continued financial and political uncertainty surrounding Brexit. The latest House Price Index shows the average UK house price to be £226,798; down 0.2% on the previous month and an increase of just 1.4% compared to the previous year. Taking the current rate of inflation into account, year-on-year property values have slightly decreased in real terms.
Interestingly, research from the Royal Institute of Chartered Surveyors (RICS) found that even as tenant demand continues to increase, landlords are more likely than ever to leave the market. In fact, landlord instructions have declined every quarter since mid-2016, which is the longest uninterrupted sequence of falling instructions since 1998. So, what’s happening?
Tax, political motivation and tighter regulations
In recent years, landlords have been hit with numerous tax changes and tighter regulations from the UK government. These began in 2015 when former chancellor George Osbourne announced some fundamental tax changes.
Since April 2016, a higher rate of Stamp Duty is payable when purchasing a Buy to Let or second home, making the initial purchase much more expensive. This additional outlay is tiered from 3% for properties up to £125,000 then 5%, 8%, 13% and 15% respectively for the portion of the value of the property that falls into each price tier.
Then, since April 2017, Buy to Let investors are no longer able to claim all their mortgage interest payments as a business expense. This interest rate relief is being reduced over time and, currently, you can only claim 25% of the interest as tax-deductible. Next year, it will be zero, meaning a bigger Income Tax bill.
Previously, a 40% higher rate taxpayer with a rental income of £20,000 a year with an interest-only mortgage costing £15,000 would have only had to pay tax on the £5,000 profit. This meant £2,000 for HMRC and £3,000 for them.
By next year, tax will be due on the full £20,000 rental income. So, a £2,000 Income Tax bill has quadrupled to £8,000 – resulting in a net loss of £3,000!
Changes to tenant regulations are also affecting landlords. Currently, the Section 21 notice means landlords can give two months’ notice to a tenant to leave their property. Because no reason needs to be given, it’s commonly used for instances of rent arrears as it’s simpler and cheaper than having to go to court.
However, this notice is being removed, which effectively creates open-ended tenancies and a big headache for landlords with troublesome tenants.
Finally, letting fees have also just been banned. Whilst some agents may have abused the old system, there will inevitably be some cost to pass on to the landlord and/or tenant for an application.
The future of Buy to Let?
In recent years, we’ve all heard Buy to Let success stories from clients who have made significant capital gains or rental profits from property. What you don’t hear as much about are the stories of broken boilers, rent arrears and void periods. All of these have a significant impact on profits – especially when yields are already diminishing.
When you’re a landlord, you’re essentially running a small business. It can take up a lot of time and attention, but if you try and pass this responsibility onto a letting agent, you lose a portion of your (already tight) profit to management fees.
Consider also that if your home is your biggest asset, owning rental properties also means that a significant portion of your total wealth is tied up in one single asset class. This is a risk in itself as you’re exposed to fluctuations in one single market.
Property is also a relatively illiquid asset. Selling a property can take months or even years, and you can’t quickly realise any profits without potentially discounting the price. Timing the sale to maximise your return can also be a challenge.
And what about Buy to Let mortgages? Many lenders have reduced the maximum loan-to-value limits or increased the rental ‘stress test’ which often limits the borrowing available based on the anticipated rental income. Many lenders also look at a landlord’s entire portfolio during underwriting. This can make it harder for investors with multiple properties to secure the mortgages they need.
While landlords are facing many challenges, it’s not all doom and gloom.
For example, if you’re thinking of buying a Buy to Let you now have the highest choice of mortgage deals in more than 11 years. Moneyfacts reports there are now 2,396 mortgage deals available to landlords; the highest level since the financial crisis of 2007.
Landlords are increasingly holding properties in a limited company for tax reasons, and so many lenders have also adapted their criteria to allow landlords to borrow using a limited company. This growth in lender choice is set to continue in 2020.
And, while a report by Shawbrook Bank and the Centre for Economics and Business Research has forecasted that average rental yields will fall from 4.9% in 2017 to 4.1% in 2023, there is still strong demand from tenants which will support yields.
The report found that yields still exceed 5% in the North West, North East and Scotland, and so there are still good returns to be found.
So, if you’re planning to invest for the long term, and you’ve taken the right advice, there’s no reason why Buy to Let can’t continue to be a viable investment.
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