Buy-to-lose? With new restrictions on buy-to-let mortgages and the introduction of other punitive measures in 2017, is there any value left in letting for mortgaged landlords?
As we enter 2017, the tide has truly turned against Britain’s buy-to-let landlords. First, George Osborne discouraged people from buying a second residential property by imposing extra stamp duty of 3 per cent. Now, the Bank of England is demanding that mortgage lenders “stress test” loans to landlords. Since 1 January, the Bank’s Prudential Regulation Authority (PRA) requires lenders to check that borrowers’ rental income would cover their mortgage repayments by a ratio of 145 per cent if the interest rate on their mortgage rose to 5.5 per cent.
Muddled policies that target the letting market, such as Philip Hammond’s ban on agent fees – which industry experts say will ultimately be passed onto tenants – indicate that the new government may be as hostile as the old one. Small wonder that a recent survey by property manager and letting agent Martin & Co found that 92 per cent of UK landlords think that Westminster is “anti-landlord”.
Unviable investments
Not only has a buy-to-let property become more expensive to buy, with the 3 per cent stamp duty surcharge imposed in April last year ensuring that if you buy a second home worth £200,000 today, you’ll owe HMRC £7,500, not £1,500 as in 2014, but later this year, changes to buy-to-let tax relief mean that for many landlords with mortgages, their investment may become completely unviable, with proposed tax increases eating away all their profits and then some.
Under current rules, buy-to-let landlords with a mortgage pay tax just on the profit they make from their investment, deducting the costs of servicing their mortgage before working out what they owe HMRC.
But between April 2017 and 2020, a new regime will be phased in which will see them liable to pay tax on their turnover – gross income including rent. They will pay tax at their highest rate, and receive tax relief at a fixed rate of 20 per cent.
The effects would be dramatic. Mortgaged landlords could see their tax bill double, with many pushed up into the higher or additional rate bands, and some will see more than 100 per cent of their profits eaten away.
These proposals target borrowers specifically; mortgage-free landlords won’t be affected. Ultimately, it may be tenants, especially families, who suffer most. In October, the Residential Landlords Association reported that the majority of landlords (56 per cent) were planning to raise rents in the next 12 months to offset the impact of changes to mortgage interest relief, with 63 per cent of those saying they are currently letting to tenants with children.
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From September 2017, anyone owning four or more buy-to-let properties will also face more stringent checks if they are to be approved for a mortgage, under the new PRA stress test regulations. This is likely to make the underwriting process more onerous for financial institutions and, as John Charcol’s Simon Collins told This Is Money, landlords with portfolios of three or more buy-to-let properties may be saddled with higher interest rates from high-street lenders, even if those with one or two properties see mortgage rates come down this year.
It could also drive up the costs of borrowing. If buy-to-let mortgage lenders decide not to cater to those with larger portfolios, competition among lenders may diminish.
So is there still value to be found in the buy-to-let market?
Key considerations
It is very important to think about where you are buying. Certain factors will always increase demand for housing in an area, such as a growing population, a lack of housing supply and improving transport infrastructure. And, obviously, the underlying value of a property will dictate the yield you make from rental income. “There’s two sides to buy-to-let investing,” says David Lawrenson, owner and founder of private rental consultancy Lettingfocus.com. “One aspect is getting a good rental income after costs. But that’s no good if the price of the property is going down, so it is important to consider capital growth as well. The value of the property should be going up.”
But this year, the best landlords won’t bank on capital appreciation for a return, thinks Ian Thomas, co-founder and chief investment officer at LendInvest. “In a flatter market, landlords shouldn’t rely solely on prices to rise, but prioritise a rental yield that’ll deliver a steady income,” he says.
Last year, Mark Weedon, head of research at crowdfunding platform Property Partner, used Land Registry house price data and average private rents data from the Office of National Statistics to compare property in outer London – a buy-to-let hotspot, though relatively low-yielding – with Manchester, which has a strong economy but lower prices and thus higher rental yields.
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“Based on current interest rates and assuming a loan-to-value ratio of 75 per cent, you would need an outer London property which yields at least 4.1 per cent to break even if you are a higher rate taxpayer, or 4.5 per cent if you are an additional rate taxpayer,” says Weedon. Nottingham, Birmingham and northern cities such as Manchester generally offer much higher yields.
With lenders demanding larger deposits, it has become more difficult to fund a buy-to-let investment with a mortgage. It makes sense to consider cheaper properties which allow you to borrow as little as possible.
Structuring yourself as a company is another option, protecting you from the removal of mortgage interest rate relief, though the process is often complicated.
Student digs
Student property, in particular, is a growing market. According to CBRE, investment volumes in student housing doubled from 2014 to 2015, and value increases saw yields on these investments rise back to 2007 levels.
The North offers the most lucrative opportunities. Figures by Property Partner show that a buy-to-let in Sunderland, a student town where the average house price is just £65,200 and lets for £575 a month, would result in an impressive yield of 10.6 per cent yield – double that which can be expected in Southampton. In Teesside, property is even cheaper, and yields an average of 9.1 per cent.
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There are risks of course. Students aren’t typically the most respectful bunch, so you may have to redecorate periodically. But the UK’s universities are world-beating, and the removal of the cap on places in England means that demand from students isn’t likely to fall any time soon.
Aspiring buy-to-let landlords should also consider looking further afield. In November, research by money transfer and currency specialist World First found that the average rental yield on property in Ireland rose to 6.5 per cent from 5.3 per cent earlier in 2016 – better than anywhere else in Europe. Ireland has become the second most expensive place to rent in Europe, though the average property price is not much higher than other European countries.
A fast-growing economy home to top employers like Google and Facebook, Ireland may soon look as attractive to UK landlords as it does to multinational companies. And while the fall in sterling will make property abroad more expensive to buy, rental incomes will be higher when converted back into pounds.