14 December 2016
Is buy-to-let set to become less attractive for investors?
THE BUY-TO-LET SECTOR HAS BEEN HIT BY A STRING OF PUNITIVE MEASURES DESIGNED TO LEVEL THE PLAYING FIELD BETWEEN INVESTORS AND FIRST-TIME BUYERS, WHICH ARE INEVITABLY HAVING A NEGATIVE IMPACT ON THE MARKET. THIS IS LEADING SOME TO QUESTION WHETHER BUY-TO-LET IS STILL THE ATTRACTIVE INVESTMENT IT ONCE WAS.
Buy-to-let transactions have fallen off since the April hike in stamp duty but even so it is expected that demand will recover next year as new opportunities present themselves. It is undeniably more challenging for investors to make the profits that were possible in the past but we do not expect to see a mass exodus from the sector. Buy-to-let has long been a popular investment and with few other options to generate returns – savings accounts earning next-to-nothing in the way of interest and the stock market providing plenty of volatility – we expect this to continue.
That said, it will be more difficult to make money out of buy-to-let. The biggest concern for landlords is not so much the extra stamp duty, as this can be offset against profits for tax purposes when the property is sold, but changes to mortgage interest tax relief which will be phased in from April and are arguably more damaging. For some, the numbers will no longer add up and some may question adding to their portfolios as a result, while others may offload properties.
Lenders have been increasing their rental stress rates in anticipation of the tax relief changes so landlords will have to put down bigger deposits and ensure more than ever that they buy property that produces a good rental return. Careful consideration will need to be given before expanding portfolios or indeed investing for the first time, but then this is no bad thing.
We have received more enquiries about incorporating, which enables landlords to claim the costs of running their buy-to-lets as an allowable expense. We expect this is a route many will go down, particularly when purchasing property in future. Lenders don’t offer the same range of buy-to-let mortgages for those buying via limited companies as they do to individuals but this is being urgently addressed.
Landlords and would-be investors should not necessarily take fright at the changes to the market but it is important that they do their research extremely carefully and seek expert tax and mortgage advice before taking the plunge. Remember property is an illiquid asset and you must be invested for the long term.