The quantity of homes bought by landlords has came by another during the last three years, after a series of tax reforms knocked investor confidence. But with buy-to-let home loan rates hitting an all-time low and less competition in the market, could now be time to jump in?
Landlords are purchasing 30% fewer homes than 3 years ago, new information from Hamptons International shows. This follows a series of regulatory changes – together with a stamp duty surcharge and changes to mortgage interest tax relief – that dragged down landlord profits.
Yet as activity quietens, lenders are increasingly trying to woo landlords with attractive low-rate deals.
Which? looks at the current trends in the buy-to-let market and explains which factors you have to consider before investing.
Buy-to-let activity slows
Over yesteryear 3 years, there has been a dramatic drop-off in the number of properties bought by buy-to-let landlords.
In the first half of 2022, landlords across The uk bought 64,260 properties, the Hamptons studies have shown – 13% less than exactly the same period this past year, and a third less than in 2022.
Our graph shows how the quantity of purchases by landlords has decreased over time.
Interestingly, all regions and nations in the UK have experienced the same trend (except for Northern Ireland, that no data was released).
But some areas were hit worse than the others. The East saw the greatest drop, with the number of purchases falling by 45%, followed by Scotland having a 44% drop-off, Hamptons International reported.
By contrast, activity within the North East fell with a comparatively modest 16% – though this still represents thousands of properties.
Why are landlords buying fewer homes?
The buy-to-let sector has faced numerous challenges in recent years, that could be be dampening landlords’ enthusiasm for expanding their portfolios.
From April 2022 onwards, landlords buying new homes needed to pay an additional 3% on the normal stamp duty rates. Which means that, around the average purchase price of the buy-to-let property – lb174,580, according to Hamptons – landlords would pay an additional lb5,238 in tax.
The following year, changes were brought to mortgage interest tax relief. Pre-tax deductions on mortgage interest are gradually being eliminated and replaced with a 20% tax credit by 2022. Higher-rate and extra rate-payers will probably get a heftier tax bill as a result.
The wear and tear allowance was also scrapped in April 2022, and landlords are now limited to deductions for like-for-like replacement of furnishings.
Since 1 October, progressively more rental properties have fallen under the HMO scheme, by having an estimated 177,000 additional landlords now requiring a licence. An increasing number of local authorities will also be introducing licensing for landlords in their areas.
On a broader scale, the Bank of England raised the bottom rate in November 2022, on the other hand in August 2022, hitting 0.75% – the highest since February 2009.
The upheaval isn’t over yet. A proposed lettings fees ban, that is currently dealing with parliament, may lead to costs being pushed to landlords. And continuing uncertainty over Brexit negotiations has left a cloud within the economy and property market.
Buy-to-let rates hit record low
It may seem to be all doom and gloom for landlords, but there’s great news too: slow activity has pushed lenders to offer the lowest rates on record.
Data from Moneyfacts shows the average rate for five-year buy-to-let mortgage deals has hit 3.4%, the lowest since Moneyfacts began reporting.
With two base rate hikes in the last year and rumours more ahead, a five-year mortgage could be an appealing prospect for many landlords, especially at such attractive rates.
These deals tend to include early repayment charges if you need to sell up throughout the five-year period. Often, these decrease over time – so for instance, you may pay 5% within the newbie of the deal and 1% within the last.
If you’re prone to want to sell up, or are concern about the marketplace in the region you’re buying, it’s worth taking into consideration how these fees would eat into your profits.
Should I purchase the current market?
National and regional statistics can shed light on broad trends – but you shouldn’t use them to create decisions about whether or not to purchase a particular property.
In fact, the less activity within the buy-to-let sector, the less competition you’ll face from other prospective landlords. And as a house investor, your purchase is usually chain-free, giving you an edge over homebuyers.
If you decide buy in the present market, these are the factors you should think about:
Local property market conditions
Before you buy a good investment, it’s worth doing your research. Work out what similar properties in the area can sell for, and just how much rent is being charged. Search for yield figures, too, that will show you how much rent is usually received like a percentage of the property value.
You compares listings on the market, and ask for valuations from local estate and lettings agents.
It’s also worth researching the neighborhood economy, including whether there are jobs in the region, just how much demand there is for housing and whether any factors might push-up (or drag down) the value of your house.
Consider the demographics of the neighborhood to sort out what types of property could be sought after – a three-bedroom home may be hard to let out within an area that’s mainly child-free couples, for example.
The property and it is condition
Once you’ve found a property, check what condition it is in. For those who have an offer accepted, commission a house survey so you can be sure it has no structural issues.
If you have to renovate before a tenant moves in, work out how much you’ll need to do and the approximate cost. Avoid over-spending – the home doesn’t need to be home of your dreams, just suit a tenant’s needs.
How much you really can afford to borrow
Lenders subject buy-to-let investors to strict liability tests. As a general rule, your rental income will need to cover at least 125% of the mortgage payments. If you possess a number of homes, this can usually be calculated on a property-by-property basis, not on your portfolio as a whole.
You’ll also generally be expected to possess a deposit with a minimum of 25%.
Keep in mind that buy-to-let mortgages are often interest-only, meaning you’ll simply be paying back interest on the loan each month, not the borrowed funds itself – so you’ll need to have a plan for how you’ll pay it back after the word.
And don’t forget to take into account void periods, whenever your property doesn’t have tenant. You have to make certain other income will stretch to cover mortgage repayments between tenancies.
Your tax liabilities and running costs
Aside from mortgage payments, buy-to-let properties have ongoing running costs, including maintenance and repairs, safety certificates and, if you use a lettings agent, management costs.
You’ll should also pay tax in your rental income at the same rate as the employment income, if you can deduct your expenses.
Seek professional advice
Finding the very best mortgage deal as a landlord can be tricky. Expert consultancy from a mortgage broker will help you find the right offer for the circumstances.