If you’re a landlord or you want to buy a property to let out, you might be spooked by the recent doom and gloom headlines about the buy-to-let market.
Has the government really sounded the death knell for buy-to-let?
According to some newspapers, the buy-to-let bandwagon has not just stalled, it has crashed headlong into a ditch and been written off.
But do your own research and you’ll find a competitive and strong mortgage sector supporting many landlords to achieve a regular income and potential capital growth.
First, the bad news…
Let’s be clear – the government and regulators have introduced a slew of measures that make life tougher for landlords – and there’s more to come. Each represents a challenge, but it’s the combined effect that has prompted the ‘end is nigh’ headlines.
· The 3% Stamp Duty Surcharge is the best known of these, affecting anyone buying a second or additional property from April 2016. If you buy a property costing £275k for example you will pay Stamp Duty of £3,750. But if you buy a second or additional property for £275k you will trigger the surcharge and pay a whopping £12,000 – a clear deterrent to enter the buy-to-let market or expand your portfolio.
· Income tax changes being phased in from April 2017 mean landlords won’t be able to offset their mortgage interest against rental income (getting a tax credit instead). It’s complicated stuff but if you’re a higher or additional rate taxpayer you could see your tax bill rise significantly.
· A tweak to the Wear and Tear Allowance from April 2017 has less dramatic consequences, but could still chip away at landlords’ profitability. Instead of claiming an automatic 10% wear and tear allowance, landlords will only be able to claim for the cost of work actually done. It’s an extra admin burden, but it will also mean a higher income tax bill for those who haven’t done work to maintain the standard of their property.
· The banning of letting agent fees to tenants is good news on the surface, although an unintended consequence could be that letting agents claw back their loss by hiking fees to landlords. However, a similar ban in Scotland hasn’t led to landlords paying more. This policy proposal still needs to go through consultation, but the Government has said it would like to ban the fees as soon as possible.
· New Prudential Regulation Authority rules from January 2017 could make it harder to get the numbers to stack up on a buy-to-let mortgage. Most lenders will now check you can afford your mortgage at 5.5%, even if your pay rate is much lower. And the majority will want your rental income to cover a minimum of 145% of your mortgage payments in order to lend to you. Professional independent advice from a broker that specialises in buy-to-let will become more important than ever for landlords.
All of these measures make it more difficult for landlords to get a mortgage and make a profit, but don’t despair – there’s plenty of good news too.
The buy-to-let sector is resilient, based on strong fundamentals and supported by the most competitive mortgage rates ever available to landlords.
So, before you write off that dream of becoming a landlord, read beyond the headlines and see the whole story:
· Strong demographics support the private rented sector, the population of which has doubled to 4.9m since 2001 overtaking social housing to become the second largest housing tenure after owner occupation. And the UK population is still growing, expected to hit 71 million by 2030, according to the Office for National Statistics.
· ONS figures also point to a slowdown in owner-occupation, insufficient housebuilding, increased net migration, and an increasing student population supporting long-term demand for rented property.
· Added to that, buy-to-let mortgage rates are at all-time lows making mortgages cheap to service. For example, the average buy-to-let five-year fixed rate for those with a 25% deposit fell by 0.49% in the six months to September to stand at 3.96% (Moneyfacts).
· Average UK rental income is riding high, ranging from £800 to over £1,000 a month, depending on which report you read, plus eight in 10 letting agents expect rents to rise next year, according to the Association of Residential Letting Agents. It adds that the average void period is just three weeks between tenancies with tenant demand still strong.
· House prices have never been harder to predict than in 2017 with the economic fallout from Brexit still unknown. However, most experts expect a modest rise in prices – The Royal Institution of Chartered Surveyors says 3% – so capital growth potential is still robust, especially over the long-term.
Strong fundamentals underpin the private rented sector, despite current challenges, so do your own research and take mortgage advice.
Doom and gloom headlines don’t represent the experience of many landlords up and down the UK, enjoying high rental income, strong demand and low mortgage rates.