The challenges & opportunities
Buy-to-let property has long been a lucrative option for investors to yield double-digit returns and secure a solid, reliable income for retirement. However, buy-to-let has been under the hammer lately, with changes to Stamp Duty Land Tax (SDLT), cuts in tax relief and new, stricter mortgage lending rules. Existing landlords are already considering their options. New landlords are being deterred from potential investments. Is buy-to-let really dead though? Or is it really just a storm in a teacup?
The current challenges
(1) Stamp Duty:
Indeed, the 3% SDLT surcharge has left a bitter taste for investors. In advance of April 2016, estate agencies reported a rise in transactions, partly due to landlords trying to beat the deadline. And why wouldn’t they? On a £250,000 property, the SDLT before 1 April 2016 calculated to £3,750, compared to after, £10,500.
(2) Mortgage interest relief cuts:
Landlords can currently claim back tax relief on their buy-to-let mortgage interest, essentially meaning that the profit is taxed, not the income. From April 2020 this will change and tax relief will only be available up until the basic rate of tax, currently 20%, with a phasing-in of this new system from April 2017. Higher-rate and top-rate taxpayers will inevitably suffer, as additional tax payments will eat into their annual rental returns.
(3) Mortgage regulation:
Mortgage lending regulations have also been given a squeeze as the Bank of England (BoE) were concerned this segment of the property market was a risk to the wider economy. From April 2016, new EU rules will be enforced under the Mortgage Credit Directive, making applications tougher, and curbs on UK lending could see landlords requiring bigger deposits.
These key challenges, along with the scrapping of the Wear & Tear tax allowance from April 2016, which gave an added 10% tax relief perk to the rental accounts, and new responsibilities on landlords to carry out residency checks on tenants, are certainly leaving landlords considering their options.
The remaining opportunities
Some say “the bigger the challenge, the bigger the opportunity” and whilst the government have intervened and created a number of challenges for property investors, there is regardless still opportunities to be had from investing in buy-to-let.
(1) High demand for rental properties:
Tenant demand remains high and according to a survey by Kent Reliance Building Society (KRBS), almost 50% of landlords suggested that tenant demand grew by up to 3% in the last quarter of 2015. With property prices soaring, property ownership becomes unaffordable for many, and a greater need for flexibility in accommodation means the desire for renting homes doesn’t look to be slowing down anytime soon.
(2) Record low mortgages:
The 7 year+ 0.5% BoE base rate has helped keep the cost of property finance, for both residential and buy-to-let, to a record low, meaning landlords are saving on their outgoings each month. The choice of loans is also now wider than ever, with c25% more options available now than a year before, meaning landlords can grab a competitive deal with lenders who are still keen to do business.
(3) Stable yields:
Average yields in the last quarter of 2015, according to KRBS, were 6.3% and are expected to remain at around 6.4% in 2016. A yield is calculated by working out the annual rent received as a percentage of the property price, so a £250,000 property earning £12,000 a year in rental income, would have broadly a 5% yield.
The verdict so far
So will the challenges actually kill-off buy-to-let, despite the opportunities?
43% of landlords surveyed by Paragon suggested the SDLT would have an impact on their buying decisions, increasing to 63% for those landlords with more than 20 properties.
Trading as a limited company will be an option for some property investors to ensure they can continue to claim the maximum tax relief on their mortgage costs. The same Paragon survey revealed 5% had already converted and 41% were considering it, despite added costs of running a limited company, and other factors to account for.
Given the tenacious nature of many property investors though, whilst the challenges will be a bridge to cross, so long as there are opportunities still available, there will be investors willing to fight a bit harder for their returns. In essence, “where there is a will there is a way”.
Read more of Darren’s Financial & Investment updates:
- Financial planning for the 21st century family
- Planning for a gradual or immediate retirement?
- Help your children buy a home
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