New figures show interest in landlord mortgages has hit an eight-year high thanks to rises in rents and property prices. But upcoming tax changes could dampen demand.
The returns enjoyed by owners of buy-to-let property recently have rarely been better.
With house prices continuing to rise and average rents hitting all-time highs, it's no surprise that there has been a surge of interest in becoming a landlord.
Rents pass £800 a month
Figures published last month by letting agents Your Move and Reeds Rains showed that the average monthly rent in the UK had hit £816 in September.
This represented an annual rise of more than 6%, way above the current rate of inflation, which has slipped into negative territory in recent months.
With the latest official figures showing that property prices are also rising at a rate of over 6% a year, it's no surprise that buy-to-let is becoming more and more popular.
Industry body the Council of Mortgage Lenders (CML) says that the number of loans advanced to landlords hit an eight-year high between July and September this year.
‘Buy-to-let beats pensions’
Meanwhile, research from the Office for National Statistics has found that people are far more likely to think that investing in buy-to-let is a better way of saving for retirement than using a workplace pension scheme.
Paul Smee, director general of the CML, says that although buy-to-let’s appeal is rising fast, this needs to be put in the context of the sustained slump in demand for landlord mortgages following the financial crisis in 2008.
“Buy-to-let continues its growth this period. But at 18% of new lending in September it remains the fourth-largest lending type behind first-time buyers, home movers and remortgages.” Smee says.
“There were five times as many house purchase loans to homeowners as buy-to-let landlords in September. And the growth in buy-to-let lending largely continues to reflect its more belated recovery from recession.”
Cheaper landlord loans
Charlotte Nelson, finance expert at Moneyfacts.co.uk, says that the price of the average fixed-rate buy-to-let mortgage has fallen steadily over the last five years.
For example in November 2010, the typical five-year loan for landlords cost 6.12% interest compared with just 4.06% today.
“The buy-to-let market is clearly booming,” Nelson adds. “With rents at a high and mortgage rates dropping to historic lows, there is great potential for prospective landlords.”
But she says that there are also potential clouds on the horizon.
The additional 3% stamp duty rate on second homes and buy-to-let properties is a big concern for landlords, and comes a result of the latest Autumn statement.
The recent increase in stamp duty means that landlords face paying a lot more tax than the conventional buyer.
End to generous tax relief
“The Bank of England has recently gained new powers to regulate the buy-to-let market, which may mean that the end is nigh for these low-cost deals.”
Nelson adds that the government is planning to reduce mortgage tax relief for landlords.
Following reforms due to begin in 2017, buy-to-let investors will only be able to claim basic-rate (20%) tax relief on their mortgage interest costs.
At the moment, higher-rate and additional-rate taxpayers can claim relief of 40% or 45% respectively.
A potential solution
Landlords may be able to continue to obtain higher levels of tax relief if they change their properties to holiday lets, which operate under different rules.
However, filling your holiday let is likely to be much harder than finding long-term tenants – and mortgages on such properties are less readily available.
Nelson adds: “Anyone thinking about entering this sector would be wise to seek the advice of an independent financial adviser to see if buy-to-let really is the best place for their investment.”
Would be landlords should consider the implications and costs involved in buy-to-let.
As well as putting a deposit down on a mortgage and making monthly repayments, there are purchase costs to take into consideration such as legal fees and the new higher rates of stamp duty.
You may have to pay a letting agent to find tenants, and there are also maintenance expenses and potential void periods – when tenants can’t be found – to be factored in.
Finally, there is also the risk that property prices and rents could fall over time, making your overall investment much less attractive.