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At one time, investing in buy-to-let properties was seen as a sure fire way to achieve long term growth. Some investors, deterred by the ups and downs of the stock market, invest in property.
This area of our website records the ups and downs of the buy to let market and as you will see it is one that has dipped and, in 2013, risen again. Some lenders have seen 10 fold lending increases in the past ten months as investors see the opportunities for good returns afforded by increasing rents and, relatively, low interest rates. This against a background of property prices that have remained relatively level, with variations around the country.
Uncertainty concerning the economy, security of employment and the inability of first time buyers to enter the housing market has fuelled demands for rented accommodation.
Investors who lack confidence in traditional savings vehicles value the opportunity of direct investment in an asset that has traditionally yielded good returns in terms of both income and capital growth. Is now a good time to invest? That is a decision that many have been considering and evidently pursuing this year. Rental yields have been steady throughout 2012/13 at just over five per cent. Set against this yield there has been a steady increase in rent arrears and there are those who are forecasting that the introduction of Universal Credit will see these further escalate.
Are there any grey clouds on the horizon? Some would say the horizon is grey, even black, but the reality is that the horizon remains greyish and all investment decisions should be taken with the benefit of much advice. Do please include us in your investment decision when it comes to tax planning and tax on your income and [possible] future capital gains.
The Council of Mortgage Lenders reports that toward the end of 2010 the number of new loans for buy to let properties rose by 12 per cent in value and 8 per cent by volume with new loans running at 26,900 per quarter and worth £32.8bn. At the end of 2010 there were an estimated 1.3 million buy to let mortgages worth £152 billion, accounting for 12% of the total value of mortgages outstanding.
The Council of Mortgage Lenders reports that "funding remains a constraint on growth in buy to let lending, but demand seems to be resilient."
With the property market remaining sluggish some investors see buying opportunities while others see the prospect of further reductions in property values. Buy to lets remain the preferred investment choice of some but it is important to ensure that so far as possible tenants are dependable as although buy to let loans are generally not available without a 25 per cent deposit an interruption in rental income can result in the need to sell - and that sale could be at a loss.
The recession is having a significant impact on the buy to let market. With the buy to let stock increasing as a consequence of 'accidental' landlords - those who didn't want to sell property in a falling market. As a result rents have been pushed lower although according to research by findaproperty.com rents have levelled out at an average of £825 a month with stable yields of 4.55%. The exception to this is in London and Scotland where rents have fallen by as much as 1 per cent.
It is reported that some landlords have added to their buy to let portfolios with almost 10 per cent of landlords having purchased.
Loans on buy to let remain available although deposits of 40 per cent or more maybe required together with a few which again can be 3.5 per cent, or more.
Investing in property has resulted in more than one million buy-to-let mortgages as investors sought the seemingly safe haven of property investment. However, the credit crunch and the recession has changed the complexion of investing in property, not only for home owners, but also those who had sought to build up a property portfolio. For many investors 2008 was a difficult year as they faced the prospect of increasing interest rates as sub prime loans came up for renewal, coupled with the fall in property prices. For many, the reduction in interest rates has eased the immediate threat of negative cash flow, although the overall advantage of capital growth has, for the time being ebbed away.
The property market has always had its ups and downs, but the public perception is that these are less extreme than has been witnessed with the Stock Market. This perception spawned a significant expansion in the buy-to-let sector, especially during the ten years to 2008. Buy to let investors have invested in residential property in the expectation of capital growth, and in so doing earn rent which is applied to cover the costs of ownership.
The buy-to-let mortgage market declined throughout 2008 with only 37,000 new loans worth £3.9 billion in the fourth quarter of 2008, representing a reduction of 56 percent (65 percent in value) when compared to the same period in 2007. There are now more than one million mortgages with more than £130 billion outstanding.
Arrears have increased with more than 25,000 such mortgages in arrears. Reasons for arrears include:
- Fraud - some buy-to-let fraud involved over-valuation to achieve a larger loan than the sale price of the property, with no rent or mortgage ever being paid.
- Payment problems on the part of the landlords - landlords are not immune from wider economic problems, and some have diverted the rental income from tenants to servicing other commitments.
- Voids - there is an over-supply of rental property in some locations, so some landlords are not receiving a rental income on empty properties in current market conditions, and may be unable to pay their mortgage as a result.
However, in any down market there are always investors seeking opportunities and prepared to take risk and the housing supply remains inadequate as we continue to create more households than new homes. Investing in property remains an investment some will pursue, especially given the current market conditions. The cautious investor will make a deposit at least in excess of the 25-30 (some have increased their maximum loan to 40 percent) percent required by many buy-to-let mortgage provider and have a cash reserve to address any issues that may arise as a result of property voids.
Yields may look attractive given the current interest rates, but what will these look like if interest rates increase by two percent? There are still reasons why some may wish to invest in property, these include:
The student scene
One particular area where buy-to-let can make sense is in the provision of accommodation for student members of the family. Traditionally, this has involved paying out fairly high rents over a period of three or four years and seeing nothing in return (except perhaps a sizeable student loan).
By buying a house in the university area, your children can be assured of somewhere decent to live and should be able to cover most of the costs by renting rooms to other students.
The situation presents significant tax saving opportunities, but the correct formalities need to be observed. One of the most important is that the property should be bought by the student, not the parent. Lenders are normally happy to offer a mortgage to a student if the parents act as guarantors.
The property should then qualify as the student's principal private residence and so capital gains tax (CGT) exemption will be available on any profits from the eventual sale.
The rental income is potentially subject to income tax under the Schedule A business rules, which allow a proportion of the running costs (including mortgage interest) to be claimed against the rent. Alternatively, the provisions of the Rent a Room scheme allow the first £4,250 of rent in each tax year to escape tax, with any excess rent over £4,250 being taxed in full.
If a property has, at any time, been your main residence for CGT, it may also be possible to claim the residential lettings exemption as well as exemption for the period of occupation as your main residence and the final 36 months exemption
A significant CGT saving can result from occupying a property as your main residence for a relatively short time - consult us about this, and any queries you have about residential letting.