It’s often said the British are obsessed with property. The continued attraction of the Buy to Let market for many with money to invest certainly supports that. But if it’s a step that you’re thinking of taking, carefully weighing up both sides of the Buy to Let debate is crucial.
At a glance, it’s easy to see why Buy to Let remains a go-to investment option for thousands of Brits. It gives you an opportunity to invest in a tangible asset, which, compared to putting money in the investment markets, may help you feel more in control. You also have an opportunity to create both a regular, monthly income and the potential for capital growth in the future.
Even after an 11% year-on-year decrease, £800 million was lent through new Buy to Let purchase mortgages in November 2018 alone, according to UK Finance figures. Buy to Let remortgages performed better, indicating those already investing in Buy to Let are confident about the future. In the same month, 15,000 new Buy to Let remortgages were complete, representing £2.4 billion of lending and 9.1% year-on-year growth.
With thousands of landlords up and down the country, it can be tempting to seek the benefits they’re getting from Buy to Let, and there are a few that make it a tempting investment now.
Increased profits: As with any investment, the returns you could create are key in the decision-making process. For landlords, the interest rates present an excellent opportunity. Buy to Let mortgage interest rates are low, and the market is competitive, whether you’re looking for a fixed, variable or tracker mortgage. In turn, this means your profit margins are greater.
Investment growth: There might be concerns about the housing market at the moment, but historical figures show it’s resilient. Over the long term, housing prices have increased significantly. A look over the last twenty years, for example, shows the average house prices has gone from £66,231 in March 1998 to £223,679 March 2018; a 237% increase despite the effects of the 2008 financial crisis. As a result, when you come to sell your property, you could benefit from capital growth.
Strong rental market: There’s also a strong demand for rental properties. You’ve probably come across the term ‘generation rent’, referring to the fact many young adults aren’t purchasing their own home until later in life, if at all. In fact, the average first-time buyer is now in their thirties. What’s more, average tenancy lengths are increasing too. The average tenant now stays in a property for 20 months, a figure that is gradually rising, providing landlords with more stability.
The drawbacks of the Buy to Let market
While the potential returns of becoming a landlord can seem attractive, there are drawbacks to consider too. As with all investments, there are risks involved when purchasing a Buy to Let property. Before deciding, weighing these up against the expected gains is crucial.
Responsibility for maintaining property: First, acting as a landlord inevitably comes with responsibility. It’ll be up to you to ensure the property is maintained and meets regulations. This ranges from the structure of the building through to gas appliances. Not keeping your property maintained could lead to costly penalties.
While Buy to Let is an obvious monetary investment, you should also expect to invest your time in it. You do have the option to use an estate agent or management firm to handle the day-to-day tasks, but this, of course, will eat into the profits your property generates.
Stamp Duty: When purchasing and selling a Buy to Let property you need to factor in the Stamp Duty rates you’ll pay. When first buying a Buy to Let property, it means you’ll need to set aside additional cash to cover the bill, while it’ll also reduce the amount of profit you’ll make when selling too.
The amount of Stamp Duty you’ll need to pay depends on the value of your property.
|Property price||Buy to Let Stamp Duty rate|
|Up to £125,000||3%|
|Over £1.5 million||15%|
Void periods: You can’t guarantee when your property will have tenants. Even when it’s empty, known as a void period, you’ll still need to meet mortgage repayments. As a result, you’ll need to have a buffer to cover potential costs while there’s no one living in it. As a general rule, assuming that your property will be empty two months of the year, and budgeting accordingly, can help provide you with a safety net.
Along the same the lines, there’s also a risk that you’ll let to bad tenants. Whether they damage your property or don’t meet their rent payments, it could leave you in financial difficulty if you don’t have liquid assets to fall back on.
Stalling property prices: Brexit uncertainty and other political factors are causing property prices across the UK to stall, particularly in London and the South East. While we’ve already mentioned that, historically, house prices have performed well over the long term, this isn’t a guarantee of how they’ll perform in the future.
If house prices do fall, you could end up owing more on your mortgage than you can sell the property for. As most Buy to Let mortgages are interest-only, the risk of negative equity is a greater concern for landlords than the typical homebuyer. However, this risk is reduced when you look at the property with a long-term view, as house prices have corrected in the past. As a result, purchasing a Buy to Let with the view of selling relatively quickly may mean it’s not the right option for you.
Reducing tax relief limits: In the past, Buy to Let investors were offered attractive tax reliefs. However, these have gradually been reduced and regulatory changes could see them cut further. Making sure you understand the current incentives on offer is important before you make a move.
For example, since April 2018 the relief available on mortgage interest started to be capped at the basic rate of 20%, by April 2020 all landlords will be affected. Prior to 2016, landlords could also claim 10% tax relief for costs associated with wear and tear, this has since been scrapped.
If you’re considering investing in the Buy to Let market, please contact us. We’ll help you understand how the decision could affect your financial security, as well as the alternatives to consider.