Avoid getting swept away as investors rush into buy-to-let

THE BRITISH love affair with bricks and mortar is back on as buy-to-let investors rush to take advantage of Chancellor Rishi Sunak’s stamp duty holiday, but experts are urging them to act with their heads and not their hearts.

While buy-to-let can generate an attractive combination of rental income and capital growth when house prices rise, setting yourself up as an amateur landlord is costly and requires effort.

It may also be less rewarding than before, as millions are set to lose their jobs after the Government furlough scheme ends, which could squeeze rental income and make it harder to find tenants.

That is unlikely to deter die-hard investors, as the Chancellor’s stamp duty holiday could save buyers a maximum £15,000 on properties up to £500,000.

Many were surprised that the stamp duty benefit is also open to buy-to-let investors and second-home owners, as this could give them a competitive edge over first-time buyers.

Mortgage brokers and estate agents say it triggered an immediate surge in interest though, with investors desperate to complete before the deadline of March 31, 2021.

FIGHTING BACK

The rush of buy-to-let investors back into the market reverses the trend of recent years, which saw landlords walk away after a concerted tax attack by the Treasury aimed at levelling the playing field with first-time buyers.

The Government scrapped higherrate mortgage interest tax relief, reduced wear and tear allowances, and imposed a 3 per cent stamp duty surcharge on investors and second-home buyers.

This surcharge continues to apply on the full purchase price, so somebody buying a £500,000 property will still pay £15,000.That is half the £30,000 they would have paid before the stamp duty holiday.

Investors hoping to pick up a cut-price property in the wake of the pandemic may be disappointed.

Chris Sykes, mortgage consultant at broker Private Finance, said the stamp duty holiday may now support property prices: “This could reduce your chances of picking up a bargain.”

Buy-to-let investors have made good money in the past but north London estate agent Jeremy Leaf said success is not guaranteed in today’s uncertain world: “Rising unemployment and economic uncertainty may reduce rents and occupancy rates, to say nothing of capital values.”

However, if you choose your location carefully, you can still make it work. “Buy-to-let should continue to offer long-term investors steady income, particularly where demand for well-managed accommodation exceeds supply,” Leaf added.

DO YOUR RESEARCH

Miles Robinson, head of mortgages at online broker Trussle, advised researching the local rental market carefully and taking steps to understand all the regulations and restrictions surrounding renting out a property, as these have been tightened considerably.

He said to seek advice from an accountant or mortgage broker, and to make sure you understand how buy-to-let mortgages work: “Most are interest-only and require a large deposit, generally at least 25 per cent of the property’s value.”

There is a growing choice of buy-to-let deals according to comparison site Moneyfacts, and rates have fallen since the start of the year.the average two-year fixed rate charges 2.61 per cent, with five-year fixes at 2.97 per cent. Buyers with larger deposits may find cheaper deals.

Eleanor Williams, Moneyfacts finance expert, said prepare for ongoing costs too: “These include property maintenance, covering mortgage repayments when your property is empty, chasing late rent and non-payments, and day-to-day management.”

Many existing landlords face the unpleasant task of negotiating with loyal tenants who can no longer afford their rent due to the Covid-19 crisis.

You could hand over all of these tasks to a letting agent, but you will have to pay them around 15 per cent of your rental income.

‘Landlords face unpleasant task of negotiating with loyal tenants who can no longer afford the rent’

TAX TROUBLE

The Chancellor is reviewing capital gains tax (CGT) in a bid to generate extra revenues and Rod Smith, head of the private client team at legal firm Royds Withy King, warned this could hit buy-to-let landlords.

The Chancellor could even align CGT rates with income tax.this means landlords could pay 40 or 45 per cent tax on any profit when selling a property, against today’s rate of 28 per cent. “Buy-to-let investors have seen their tax advantages eroded and any CGT changes may hit them hard,” Smith said.

You should also compare investing in buy-to-let with tax-free methods of building wealth for the future, such as a Stocks and Shares Isa.

Despite this, many will still prefer to invest in property, as the British love affair with bricks and mortar is enduring.

Like any relationship, you have to be committed if you want to make a success of it. Only fools rush in.