Success of buy-to-let investments in recent years is the obvious reason why it is attracting ever more interest and increasing borrowers. In fact, it is currently the only mortgage sector during a minor slump that is seeing issuance increase.
Price war, rental surge
Most borrowers view buy-to-let as a way of increasing monthly income as well as providing a long-term investment opportunity, says Dale Jannels, managing director of All Types of Mortgage.
It all comes down to securing a decent yield, which is achieved in the classic model by buying a property in need of refurbishment and bringing it up to standard before renting out.
Even a less labour intensive model could produce a significant return in the current market, which is marked by falling mortgage rates for landlords in the wake of a clampdown on residential lending and surging tenant demand which is supporting higher rental income.
The prosect of low rates continuing and housing demand outstripping supply is creating a perfect storm: lenders are competing for business that is plentiful and low risk. Rates for two-year fixes at modest loan-to-values can now be below 2 per cent.
Demand for rental properties is high and will remain so for some time while first-time buyers struggle to save deposits and raise mortgage finance, Mr Jannels points out.
He says customers and advisers should do their homework to make sure the upside of this type of investment outweighs the downside. Research is vital in regard to the area your client is looking to invest in, the type of property, target tenant and rental yields achievable.
As new lenders enter the market, Charles Haresnape, managing director of mortgages and commercial lending at Aldermore, says there is an even greater deal of choice available than there has been in recent years.
“Rental property has proven to be an excellent long-term investment, and the market is now worth around £1,000bn.”
Costing downsides
Costing the downside of buy-to-let is vital, our experts agreed.
Chris Maggs, buy-to-let commercial manager of Accord, says landlords need to think about how they can ensure the mortgage repayments can be covered should the property be vacant or the tenant fails to pay the rent.
Periods of vacancy and failed payments would need to be factored into the financial plan and would likely be a part of any affordability assessment carried out by the lender.
Costs for maintenance and redecoration also need to be factored into the equation, along with any service charges or ground rent, in the case of leasehold flats.
Landlords should consider the best way to manage the property and Mr Maggs says serious questions should be asked about whether they have time to do this themselves, or if they need to take on an agency to do this for them. That too would add to costs and eat into returns.
Also when calculating the cost of this type of investment, Mr Maggs says income generated from a buy-to-let property is subject to the same tax rules as any other type of income.
Even the rate itself needs to be factored forward to ensure continued affordability - after all, property is and should always be considered a long-term investment.
Mr Jannels says: “Gone are the times when two lenders shared the majority of the market. Many lenders are now competing and some new entrants are also targeting this sector.
“However... rates may be low now but they will rise at some point and this must always be factored in to any future budget and rental calculations.”
Rental increases might not be sustainable at current rates of increase either - especially if Labour come to power having pledged to cap rental rises at inflation plus 1 per cent a year to ease the burden on low-income tenants.
Pensioners love property
Of course, another key area of growth for the market could follow the new pension changes, which a number of studies have suggested could see baby boomers releasing cash to add to their property portfolio.
Research suggests the current crop of pensioners are especially big fans of tangible ‘bricks and mortar’ investments and are attracted by the returns on offer, which can be as high as 17 per cent a year for a let property in the south-east.
Mr Haresnape notes: “The government’s own figures suggest that by 2032, more than one in three properties will be owned by private landlords.”
Advisers, though, have been broadly outspoken against the value of buy-to-let investments for pensioners.
This is primarily because the tax position is highly unfavourable: money is taxed on the way out of the pension and all future income in that year, including from the property itself, will also be taxed at whatever rate is triggered by the withdrawal, up to 45 per cent.
In addition, the property purchase will attract stamp duty and future sales will trigger capital gains tax. The property will also form part of the estate for inheritance tax, unless subsequently gifted.
Property is also illiquid, meaning that older people who suddenly need to access their amassed wealth, for example if they require long-term care, may incur delays while the property is sold.
