Is it still wise to bet the house by becoming a buy-to-let landlord?
AWAY FROM your own home, apart from shares held in a property or buildings supplier, the key way to gain from the sector is ‘buy-to-let’.
Not only should the rent fund the mortgage and provide some income but the appreciation should prove a solid investment. It is also a major way to diversify one’s savings. No wonder it is a £1.4 trillion industry.
Mortgage lending is currently on the up. Approvals rose 11 per cent in April with gross lending increased by 13.3 per cent (£20.4 billion).
Prices continue to rise with the average house up 4.2 per cent in the past year to £224,144, according to the Office for National Statistics. For the average detached property, the increase has been 5.2 per cent to £348,270, says estate agent Savills.
Property inflation has been so marked that in some parts of the UK, homes are ‘earning’ up to £50,000 a year more than those who live in them.
This may encourage buy-to-let (BTL) investors to look for such areas as north London and north Herefordshire, which have shown the largest increases. When negotiating, Hometrack research reveals the average discount between asking and sale prices is now 4.7 per cent.
Four factors are boosting prices in the Midlands and northern England: Record high employment, very low loan rates, fewer homes on offer and the longer recovery period from the credit crisis of 2008.
To cut competition for firsttime buyers, the Chancellor changed the tax arrangements for BTL in April 2016. An additional three per cent stamp duty charge on second homes was imposed and a cut in tax relief that could be claimed on loan costs, tapering it to the basic rate of income tax by 2020.
Previously landlords could offset mortgage expenses against rental income and then pay tax on the balance. Only new furniture is an allowable expense and no longer can up to 10 per cent of net rents be offset against wear and tear.
This has reduced the number of BTL landlords by 88,000 in two years although HMRC says there are 2.5m investors.
Increasingly landlords are using lump sums created upon retirement from pension pots to acquire a BTL site and around two-thirds are mortgage-free. In 16 per cent of cases, landlords have inherited the property.
Once a property is sold, capital gains tax is liable on any gain after deducting available annual exemptions at a rate varying from 18 to 28 per cent.
One idea is to set up a trust if paying for the education of your children or grandchildren out of taxed income. Gift the BTL property to the trust and pay the rental income into it rather than receive it personally.
It can fund the education but children have to be over 18 – but with no age limit for grandchildren – as otherwise you are still taxed on the income.
Yet specialists are adamant that there is a good future in BTL with half of the landlords owning just one site.
Currently a fifth of housing is provided by the private rental sector. The British Property Federation calculates that 1.8m more BTL homes will be required by 2025 and Savills predict a 15.5 per cent increase in rents over the next five years.
In undertaking BTL research, consider: The type of property, such as Victorian terrace; Condition and proximity to schools and station; Intended tenant, such as students, young professional, family perhaps; Current local BTL demand. When considering the type of loan, allow for ‘voids’ when the property will be vacant, which is also a useful period for redecoration.
Around 150,000 have found they have to stay on their lender’s standard variable rate, paying an average 4.59 per cent, because they cannot obtain a new deal following tighter rules for mortgage affordability.
Four years ago the Bank of England set new regulations that lenders could not exceed four and half times a borrower’s income.
Separately the regulator, the Financial Conduct Authority, discovered that around 30 per cent of mortgage applicants could have obtained a cheaper deal and were overpaying by an average £550 annually.
In turn, tenants have seen rent rises, which affected 26 per cent in April, the highest rate since September, according to Arla Propertymark, the regulator for letting agents with over 9,000 members.
The average cost of renting in northern England is now £622 a month, says Hamptons International which uses data from its parent, Countryside, which is the largest estate agency chain in the UK.
However, new lets in London, East Anglia, South-East and South-West average £1,372.
The rental hot spots in the North are Leeds, Liverpool and Manchester with many properties yielding a gross 7.5 per cent. The numbers are boosted by 35 to 44-year-olds who account for over one million privately renting in England, the highest recorded for decades.
The BTL investor should decide if they wish to seek and check the references for the prospective tenant as well as whether they want to undertake all maintenance which can be onerous.
House Network operates as an online only estate agent with two lettings packages: £99, which typically suits professional landlords, and £425 plus £50 monthly. In return, they will collect the rent and pay the investor on a specific day even if they have not received the rent on time.
Remember to cost in obtaining an energy-performance certifi- cate on any new letting. Expect licensing shortly which will be undertaken by local authorities.
Lending for BTL accounts for 15 per cent of mortgage credit. The Government should exercise care and not undermine the sector which One Savings Bank says contributes over £15bn to the UK economy each year. Investors can expect an average rental yield of 4.4 per cent.
This has encouraged new savers who have seen the marked rise in the value of their own home with many refinancing onto a BTL loan and purchasing a new property to live in.
House Network has seen far more suburban BTL sites emerging as well as professional investors who run private property as a business, often purchasing one bedroom homes very close to city centres and often off-plan.
Once the research is complete, consult an experienced broker who will not only have access to the best loan terms but know which lenders are likely to be sympathetic. Yorkshire Bank accepts up to 80 per cent loan to value and has deals up to 25 years. Unlike some banks, it will lend on former local authority property up to seven storeys. BTL property above four floors requires a lift.
Capital growth and regular income are two investment keys that will ensure BTL remains a strong savings option for years to come.