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The lowdown on buy-to-let
The growth in the buy-to-let market over the past decade helped to fuel the property boom. But with the housing market in meltdown, is this the time to pull out? Financial journalist Niki Chesworth takes an overview
Property prices are falling, cheap buy-to-let mortgages are harder to find and it is becoming more difficult to sell… but it’s far from bad news for all investors. Many are benefiting from strong rental demand, rising incomes and a fall in Capital Gains Tax. Here’s what you need to consider:
If you already own a buy-to-let
Property prices will eventually recover, so sit tight. But if you have to sell in the near future, market your property now. Some gloomy forecasts predict prices could be 10% or even 20% lower within a year.
Rental demand is high
More people want to rent because they cannot afford to buy; or are postponing buying while prices are still falling; or cannot find a mortgage because of the credit crunch. The number of tenants has increased by 5% since last October, so most property investors will have little difficulty in finding a tenant.
There could be blackspots
Watch out for over-supply – too many available properties and too few tenants. Some over-priced new developments over-sold at the peak of the market have halved in value. Homebuyers who need to move may decide to rent out rather than sell, so keep an eye on your local market. Look for tenants prepared to sign long-term tenancy agreements.
Make the most of rent rises
The capital value of your property may be falling but rents are rising, with gross yields averaging more than 6%. Use any extra rent to repay your mortgage more quickly or to provide a cushion against a rental void in the future. Again, watch your local market. Despite strong demand, experts say rents are falling in some areas and for certain types of property.
Beware of benefit changes
Tenants on housing benefit are now more of a risk. Instead of rent being paid directly to the landlord, from April 2008 the benefit goes straight to the tenant – who may be tempted to spend it. That could mean irrecoverable rental arrears.
Prepare for a payment shock
Buy-to-let investors coming to the end of cheap, fixed-rate mortgages may find their repayments rocketing. Shop around, as buy-to-let mortgages are being withdrawn on a daily basis – 600 different deals have been pulled since the end of March alone. Also, arrangement fees may exceed £1,000.
Mortgage problems
Until the credit crunch, buy-to-let investors could pay a deposit of as little as 1%. Today, you need around 15% to 35% to get a buy-to-let mortgage. If your cheap rate is coming to an end, you may be stuck with the standard variable rate of 7% , because you probably won’t have enough equity to remortgage. In fact, if you paid a 5% deposit but the property is worth 10% less today, you are in negative equity.
So is this the time to buy
Bear in mind that many pundits predict that property values are likely to fall further - and that we are unlikely to see significant capital gains for possibly years. Bear in mind the risks: if prices continue to tumble and you cannot cover the full cost of any buy-to-let mortgage, you may be forced to sell at a loss.
The maths may not add up
If you put down a 25% deposit on a buy-to-let property today, you will probably need to subsidise the rent for six years to cover your mortgage costs. You will need at least a 50% deposit to begin making money immediately. Also, take into account costs of around 15% of the rent (for management fees, maintenance and insurance), and budget for “void” periods of between three to four weeks a year on average. This may cut the yield to around 4%, so investing your cash in a savings account seems a better bet in the short term. On the plus side, rents tend to rise year-on-year, and with a buy-to-let you will have the potential for capital growth.
How the new tax rules cut a landlord's bill
The new flat rate of Capital Gains Tax of 18% introduced in April 2008 means a significant tax cut for many buy-to-let investors, who were liable for up to 40% tax before the rule change. On a £100,000 gain that is a tax saving of £22,000.
* This article first appeared in the July 2008 edition of Saga Magazine. Niki Chesworth's opinions are her own and for general information only. Always seek independent financial advice.
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