The continuing upward trend in the buy-to-let market has caused the government to put the breaks on this investments area, as announced in the Chancellor’s Autumn Statement. Effective from April 2016, this clampdown will see a new 3 percent stamp duty placed on all buy-to-let properties purchased—including second properties—in other words, properties that will not be your main home.
Phil says, ‘This was a shock to everyone, particularly given the loss of the tax-deductable benefit on buy-to-let. Currently, the dust is still settling, but my expectation is that buy-to-let may still make sense for some investors who are more motivated by long-term capital gains rather than initial rental yields. But, as always, anyone contemplating a buy-to-let investment should make sure they are completely up to speed with these latest developments—including the new responsibilities for landlords under the Deregulation Act 2015—before taking the plunge.
However, mortgages are currently attractively accessible thanks to the Bank of England cutting the base rate to 0.5 percent a few years ago, the lowest level in its 320-year history. This means that buy-to-let still appears to offer a safer and more tangible long-term investment but it’s important to know exactly what you’re dealing with. It is prudent to work out if this is a possible investment plan for you, in which case there are some high street banks who offer help, providing you meet the following requirements:
• You are at least 25 years old
• You will not be over 75 years old at the end of your mortgage term
• This is not your first mortgage
• The property is in good condition and not divided into separate units
• Your property is being used for rental purposes
The crucial caveat here is that: ‘it’s important that you can afford your personal commitments so that the rental income can be used to cover the Buy to Let mortgage and other property costs.’ And this is where the risk factor needs to be carefully considered by anyone planning a buy-to-let mortgage arrangement.
What can go wrong?
Although the buy-to-let sector is still dominated by professional landlords, in more recent times, with changes to pension pot payouts, as well as more volatile investments in other areas, buy-to-let appears to offer a safer investment, plus a means of covering your costs or better.
While the professional landlords know exactly what they’re getting into, for the newcomers, such as pensioners and others with savings to invest, it is a prudent investor who works out the potential downside as well as the potential upside of a buy-to-let commitment. Consider the following:
• Buying a property to let in an area or region where you hope to retire at the end of your working life may not be the best choice for a property for which you’ll need long-term or regular tenants. A buy-to-let property in a busy commuter corridor may well be a wiser purchase than an idyllic cottage in Wales, leaving you with the option to sell at a later time when your investment has paid off.
• One criticism of the greatly increased buy-to-let market is that this has caused many properties in many regions to be over-valued, and therefore are out of reach for first-time buyers—a further reason for the government introducing the new 3 percent stamp duty, mentioned above. Experts advise that newcomers to this buy-to-let market should be particularly wary of areas where price hikes in many regions could lead to a collapse in the value of properties to the extent that they become out of reach for many.
• Don’t bite off more than you can chew is a down-to-earth piece of advice when it comes to a large loan such as a buy-to-let mortgage. You may need to be able to show the bank that you can afford the repayments even when interest rates increase—many banks will want to see that you will be able to afford potentially higher monthly costs as rates rise. Bear in mind, too, that high street banks today also have to show that they are lending more responsibly than has been the case in some instances in the recent past. The new rules are a dramatic change from the days when a bank simply handed out four times a person’s salary, or three times a couple’s joint salary, and made few checks on their finances. And most banks and building societies are also testing applicants on the basis of mortgage rates hitting 7 percent in the next five years to make sure they can cope with rising costs.
It’s worth remembering …
If a couple applies for a mortgage and both of you are earning £40,000 each, you should be able to borrow more than the couple where one partner only is earning £80,000. This is because in the latter case there is a big risk should that single earner loose his or her job.
Basics to work out
Annual or monthly insurance costs
Annual or monthly rates for the property
Cost of property refurbishment at the outset, and the cost of maintenance on a regular basis
Extra over the life of the mortgage
Your extra monthly payment
Your monthly payment (interest-only)
Your monthly payment (repayment)
Are you prepared to be a landlord?
Many non-professional landlords will opt for a letting agency or estate agency to deal with the business of finding suitable tenants, the tenancy agreement and all related matters. This may be well worth the agency fees, especially when problems arise such as the risk of non-payment of rent, which can never be completely eliminated. Many landlords or their agents will aim to minimise this risk by requiring tenants to pay by standing order. Tenants are also normally expected to pay a deposit on signing a tenancy agreement and in some cases this deposit or part of it can be claimed by the landlord if there are repairs necessary at the end of a tenancy due to damage caused by the tenant.