The number of buy to let mortgages fell drastically in 2016 and 2017, from 117,500 in 2015 to 74,900 in 2017, a two year drop of 38%, which has prompted many news outlets to herald the ‘death of buy to let’. A number of factors have contributed to this drop, including a 3% stamp duty surcharge introduced in 2016 and tightening of mortgage lending rules. But does a trend like this, even such a dramatic one, really mean the death of buy to let?
What does buy to let mean?
A buy to let mortgage is very similar to a regular mortgage, with a few key differences. Buy to let mortgages are given to home buyers under the explicit understanding that they will be renting that house out rather than living in it. The rent charged to tenants will often form a large part of the mortgage repayments.
Many buy to let mortgages are interest only, meaning that only the interest is paid back for a fixed term, after which the initial investment needs to be paid off in full. This may seem strange, but often a second property is seen as an investment opportunity, so that the rent will pay for the interest, and then the house can be sold, hopefully for a profit, at the end of the repayment term.
A buy to let mortgage is for people who:
- Are the right age. There is an upper age limit of 70 – 75 and the borrower will need to have completed payments by the time they reach this age.
- Earn enough. £25,000 per year is the lowest end that most mortgage brokers will consider.
- Understand the risks of investing in property.
- Don’t have too much outstanding credit. This includes credit cards, loans and existing mortgages.
- Already own their own home, either outright or with an existing mortgage.
- Have a good credit record.
So why is the buy to let market struggling?
Tax changes
Recent tax legislation has hit basic-rate taxpayers hard. Homeowners are now taxed on overall revenue as opposed to profit, meaning that they pay tax on everything that comes in, including rental income, even if all of that rent is going into paying off the mortgage. This has forced many taxpayers into a higher tax band, making it unprofitable to own a second home.
Stamp duty surcharge
In 2016 new legislation was rolled out which requires homeowners to pay a 3% stamp duty surcharge on their second homes. This is on top of the regular stamp duty they would already pay on a purchased home. This means that, for example, a house priced at £250,000 would be liable to pay stamp duty of 2%, which is £2,400. However, a second home or buy to let property would be liable to pay an extra 3% making stamp duty charges a weighty £9,750. For home buyers who are already financially stretched this can be the difference between being able to afford a second home or not.
Stricter mortgage lending
Tougher lending rules were introduced by banks in 2017 which now require borrowers to earn up to 45% above the mortgage repayment monthly to prove that they will be able to meet repayments. In the past, lenders only needed to see that borrowers were able to cover their mortgage repayments with the rent charged. This makes life difficult for several reasons. Borrowers might have to look for cheaper mortgages and thus cheaper houses, which can be difficult to find in the current climate (see below). Similarly, a high rent price in a market where rents are already high might make it difficult to secure tenants as quickly as necessary.
The only other option is to save a bigger deposit, which can take a long time and may put people who already own their own home off of attempting to break into the buy to let market.
Housing market issues
The financial climate in the UK has certainly caused more than a few problems with the housing market. More people are living in poverty and even those who have healthy finances are finding it hard to get together the amount of money necessary to buy a home. Brexit is a deciding factor for many potential home buyers, making people reticent to buy a home as they fear that the housing market will crash. This means that homeowners are currently facing their existing homes dropping sharply in value, making the idea of purchasing a second property untenable.
Why there might be some hope
All of this doesn’t mean the end for the buy to let mortgage market, though. Over the past couple of years, as the market has been struggling, many people are finding workarounds and other options to help them to continue buying to let.
Legal loopholes
A number of investors have figured out that buying through a limited company can help to lower tax bills. Statistics show that up to 77% of buy to let mortgage applications made in the first quarter of 2018 were made through limited companies, indicating that this is the most financially advantageous was of acquiring rental properties.
Banks, not wanting to lose their mortgage borrowers altogether, have also started to put together plans for existing customers, offering them cheaper rates to remortgage with them instead of going elsewhere. This makes it far easier for a first time buy to let mortgage borrower to afford their second home.
Rental demand is strong and getting stronger
Even though high rents can be off-putting, the fact is that rents are on the rise and people still need to find a place to live. Less home buyers means more renters, and demand for rental properties is at a high at the moment. This means that if a home buyer is able to secure a home on a buy to let mortgage, it is likely that they will be able to find tenants even if they do have to charge higher rents.
Further information and help
Whether you’re an existing landlord or a prospective one, there are many reasons to engage the services of a professional accountant to help you manage your portfolio in the most financially advantageous way.
Speak to an advisor at Accounting Gem to see how we can help you turn your bricks and mortar into profit. We have packages to suit all budgets and would lover to discuss them with you on on 01473 744 700 or via email at contactus@aag-accountants.co.uk
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