The end of the buy-to-let dream? Purchases tipped to collapse by 27% in five years as tax grab deters landlords
- Tougher mortgage rules and tax crackdown means buy-to-let forecast to decline
- Small investors who need to buy with a mortgage to be hardest hit
- Landlords can still make a profit but must make sure their investment stacks up
The great British buy-to-let dream is under severe threat, a report has claimed, with a forecast that landlord purchases will dive 27 per cent by 2022.
Estate agent Savills believes the number of mortgaged buy-to-let property purchases will fall from 75,000 this year to just 55,000 in five years’ time, as small investors are squeezed out by tougher regulations and a tax grab.
The firm said it is already seeing the first signs of landlords selling up and exiting the market, a trend that is likely to continue as tighter mortgage regulations, increased stamp duty charges and the phasing out of mortgage interest relief combine to deter property investors.
Lucian Cook, director of Savills residential research, said: ‘Mortgaged buy-to-let investor numbers are forecast to fall most dramatically – we have seen the earliest signs that some mortgaged buy-to-let investors may be selling stock.
‘Those entering the market will be looking very carefully at yields, putting the spotlight on urban markets outside the capital.’
Savills’ research focussed on mortgage buy-to-let landlords, not the market for those buying outright with cash where investment is expected to remain more robust.
Its report highlights how the buy-to-let dream that became commonplace in the UK over the past two decades will be hit hard, as it becomes much tougher for ordinary investors to use a mortgage to get into property investment.
Why is buy-to-let suffering?
Finances have got tougher for landlords over the past year as a range of tax reliefs have reduced and getting a buy-to-let mortgage has got tougher.
Tax relief on mortgage interest has begun falling from a maximum of 45 per cent and by 2020 will be replaced with a 20 per cent tax credit. The change means landlords are being taxed on their revenue rather than profit.
It follows a hike in the rate of stamp duty paid by landlords purchasing new buy-to-lets, with all purchases made from April 2016 incurring a 3 per cent surcharge.
Mortgage lenders have also got stricter with most now requiring rental income to cover mortgage payments by a ratio of 145 per cent on an interest rate of 5.5 per cent – significantly more than the 125 per cent at 5 per cent that was typical this time last year.
The combined effect of the tax changes and tighter regulation has made it harder for landlords to invest, as some prospective purchases no longer stack up financially.
High house prices, particularly in London and the South East, are also a major hurdle for property investors, who typically need to raise a deposit of at least 25 per cent.
The squeeze has seen landlords refocus on where to expand their portfolios, with lower property values and more scope to raise rents from a lower base in areas such as the North West making this a more profitable prospect for investment than London and the South East.
Rents to rise in line with incomes
Savills predictions weren’t all bad for landlords, however. Rental growth is forecast to exceed house price growth in London.
This market had to accommodate a glut of stock after investors scrambled to buy before the 3 per cent stamp duty surcharge on additional homes came into effect on 1 April 2016.
Asking rents fell 3.2 per cent in the year to June 2017, compared to a 1.9 per cent rise across England and Wales.
But Savills said rents in the capital have now stabilised. Compound growth of 17 per cent is projected from 2018 to 2022, in line with wage growth but ahead of inflation.
Lawrence Bowles, a research analyst at Savills, said: ‘Withdrawal of mortgage interest tax relief will push investors from London to higher-yielding regional locations. Increased rental supply there will dampen potential rental growth beyond the capital.
‘The rental outlook is strongest in regional cities that attract employees from high-value sectors such as professional services, technology, and finance.’
The end of the buy-to-let dream?
Despite the changes to the buy-to-let sector in recent years, there still remains a desire among many to become a landlord.
We spoke to Chris Maggs from Accord Mortgages’ buy-to-let arm to share his advice for those who still want to start out in the private rental sector.
Is buy to let still a worthwhile investment?
Buy-to-let is a tougher investment to make now than it once was.
House prices are higher, the tax regime is less friendly and getting a mortgage is tougher, however, it is still possible to do and turn a profit on rent and potential capital gains.
‘There continues to be demand for private rented accommodation as people will always need somewhere to live and not everyone can or wants to buy their own home, therefore there is still a place for landlords’, says Chris.
This is borne out by a growing trend towards people living in rented accommodation.
The English Housing Survey shows that the private rental sector represented 20 per cent of households in England in 2015-2016, more than double the levels seen in the 1980s and 90s.
But landlords need to recognise that the landscape has changed, says Chris.
He said: ‘The buy-to-let market has changed significantly in the past 30 years. New landlords need to see bricks and mortar as a long-term investment, rather than expecting significant yields instantaneously.’
How should first-time landlords get started?
First-time landlords need to enter into buy-to-let fully armed with all the knowledge that they need. This is Money’s Ten tips for buy-to-let can help you understand what you must consider.
A key element is to make sure the finances stack up. You need to be able to raise a deposit, have rental income that comfortably outstrips the mortgage and know that there will be tax to pay, which eats into your returns.
From April 2016 higher rates of stamp duty apply to second property purchases including buy-to-let. This adds 3 per cent to the standard stamp duty rate and on a £250,000 property it means a £10,000 bill
‘Always seek advice from professionals before taking the plunge. A mortgage broker can provide guidance on how much you can borrow and offer advice on the best mortgage options for your circumstances’, says Chris.
‘A tax adviser can navigate you through the recent changes to tax relief and how that may impact you if you are looking to achieve regular income from the let property.
‘You will need to have a significant deposit to secure your first rental property. As lenders’ rental calculation requirements are getting tighter, lower loan-to-value mortgages are becoming more prevalent in the market, which is forcing landlords to find bigger deposits.’
The other important thing to note is the change in how rental income is taxed. Under the old system, landlords deducted mortgage interest and other finance-related costs from their rental income and then worked out their tax liability.
This allowed them to offset all mortgage interest against tax.
Now they must add rental income to their other income to decide their tax rate and the ability to offset all mortgage interest against tax is being gradually phased out between April 2017 and April 2020. From 2020, landlords will only be able to get a maximum tax credit of 20 per cent against mortgage interest.
Also by April 2018 all rented property will be required to have an energy performance certificate of E or above.
Chris says: ‘The final thing to be aware of is that while landlords have been benefiting from record low mortgage rates, there’s an expectation that this won’t last for much longer. We have already seen a number of lenders increase the rates on their buy-to-let offerings, and a potential Bank Rate rise could prompt further rises.
What other things do I need to consider?
Don’t expect an easy ride as a landlord. The simplest way to do things is to find a good letting agent and pay them to let and manage the property for you, but this service brings an extra cost.
A full letting and management service could cost 10 to 15 per cent of annual rent. You should also allow for maintenance costs on your property of around 10 to 20 per cent of annual rent
You could opt to manage the property yourself, but then you will need a network of tradespeople that you can rely on if things go wrong. If the boiler packs up, or a leak is sprung, you need to know that you can get someone round immediately.
There is a mantra that happy tenants mean a happy landlord. Keeping your tenants content means they are less likely to leave and cuts down on any potential void periods and the need to find new people to let your property to.
Chris said: ‘Being a landlord can be hard work. It requires ongoing financial investment, keeping a weathered eye on the market – especially as it is under constant scrutiny at present, plus maintaining property and relationships with tenants or letting agencies.
‘As well as having enough money to cover the deposit on your mortgage it’s a good idea to ensure that you have a nest egg that you can use to fill any rental voids.
‘Don’t be fooled that it’s plain sailing once a tenant has moved in, your property still needs to be managed and maintained.
‘That’s why lenders require rent, either expected or received, to cover your monthly mortgage payments often by at least 135 per cent, if not higher. The lender will usually base this calculation on a higher interest rate than you may actually be expected to pay to allow for increases in interest rates and to ensure a sufficient surplus of rent to cover costs of managing a buy-to-let property.
‘It’s impossible to be able to fully vet a tenant’s behaviour. Missed rental payments or damage to property are things you need to be prepared for. The tenant’s bond will cover a small percentage of this. Consider drawing up a thorough rental agreement so tenants are aware of any costs they could be liable for.’
Is there anything else I should know?
The tougher but-to-let market will also make it harder for landlords to build up a stable of properties.
Chris says: In a buoyant market landlords are able expand their portfolio by raising capital from other properties in their portfolio, which means they only ever need money for one deposit – for their first property. This method of raising capital works particularly well when property prices go up.
‘In the current market this is tougher to do. You need to ensure you have a sufficient deposit in the first instance, then further additional savings or the ability to raise equity from your property in order purchase further properties.
‘Needless to say that owning buy-to-let properties continues to be a lucrative venture for many. Earlier this year 63 per cent of landlords surveyed by advice firm Simply Business said they valued the additional income their rental properties gave them.
‘The key thing to remember is that you need to be in it for the long haul to optimise the greatest returns.’
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