Is it the end for the Buy-to-Let market?
The buy-to-let market (BTL) has been impacted severely in recent years, but 2019 still provides opportunities for smart and savvy buyers to invest in the sector.
What made the sector attractive?
A long period of very low interest rates made property an attractive asset for private investors. As well as the rental income it generated, investors further valued the opportunity of seeing substantial capital increases in their properties making it a seemingly safe bet, thereby fuelling the growth of the buy-to-let market.
Doom and gloom
After this period of sustained growth the market took a turn for the worst. In 2016 the number of mortgages for BTL properties dropped by 13%, followed by an even steeper fall of 27% recorded in 2017.
A number of significant changes had a strong adverse impact on the BTL sector thus reducing demand for such properties.
A three per cent additional stamp duty charge was introduced, and lenders’ criteria and regulations became more stringent, making access to finance more difficult. With more red tape being added to the lending process this became a further hindrance upon landlords.
While BTL investors had come to expect considerable capital growth from their investments this was no longer guaranteed as the value of the housing market, particularly in London, began to decline.
A change was also introduced in the tax relief on buy-to-let mortgage payments. Before 2017, landlords could deduct the total interest paid from their taxes. This tax relief is slowly being phased out, and from April 2020 mortgage interest will no longer be deductible. Landlords will be able to claim a 20% tax credit on the interest paid, however those in higher tax brackets could then end up paying much more tax than before, as they’ll be paying a percentage of the total rental income rather than the rental income minus their yearly mortgage interest payments.
The result has been the departure of many of the smaller landlords who perhaps owned just one or two BTL properties. With low growth rates and more paperwork, many simply sold up and found alternative investment vehicles.
As casual owners exit the sector, buy-to-let is becoming more professionalised, with investors adopting a more scrutinised approach to acquiring the right properties in the right areas, and getting them ready to rent within a limited time frame on a tight budget.
Despite no longer enjoying the capital growth of the last 20 years the income from investment in property would still hold appeal compared with investing in other assets
Higher stamp duty on second homes has had the desired effect of freeing up supply for new homeowners, with more first-time buyers getting on the housing ladder. However, there will always be a market for private rentals. Many millennials, for example, enjoy the flexibility of renting rather than buying, which allows them to make the most of career and travelling opportunities. This is likely to support the BTL sector in the longer-term.
In spite of tighter rules around lending – particularly for owners of four or more properties – specialist lenders are broadening access to finance for buy-to-let investors, offering more flexible terms than mainstream banks. Lenders typically look for rental income to cover 25-50% of mortgage payments, with larger deposits and high fees needed upfront.
The boom days may be over, but there is still life in the buy-to-let market, particularly for those who view it as a long-term investment rather than a quick and easy route to high returns. With the right financial backing, it can still prove profitable, but landlords have to pick carefully.
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