Why Buy-To-Let Should Have An Assured Future

The demand for rental accommodation is growing, due partly to the change in public attitudes towards the private rented sector and to shifting opinions concerning home ownership as an ultimate goal.

Nowadays, 20% of the population live in rented housing, double the figure 10 years ago. And that’s not all. In one study, 84% of tenants in rented homes said that they were satisfied with their accommodation and tenure.

Yet something is not quite right. Although the public’s enthusiasm for the PRS appears to be increasing, landlords seem to be suffering a backlash of criticism. So what’s going on? Much of it has to do with affordability. In many parts of the country, a shortage of housing is driving up rents.

Local policy too is to blame. For example, Article 4 Directions, which require the owner of a single dwelling to secure planning consent in order to convert the property to a small house in multiple occupation (HMO). Such policies limit shared housing and force (usually younger) tenants to rent more expensive homes.

It is understandable that many tenants would prefer to be home owners but their economic circumstances are unlikely to make this happen. At the same time, many tenants see landlords contributing to the problem by buying up stock, increasing house prices and charging them too high a proportion of their income.

Reasons for renting

The rise in demand for rental homes stems from a couple of factors. One is that people move around the UK more these days than they used to in order to attend university and climb the career ladder. They want to be able to move quickly without the responsibility of owning a house.

The other reason is financial. Housing is becoming increasingly expensive and if an individual is unable to save for a deposit or has a poor credit score, renting will be the only realistic option open to them. The Government is unlikely to build large numbers of social housing, so more homes will have to be provided by the rental sector.

However, there are some issues which should be considered. The tax system, mortgages and government legislation, together with some recent changes in these areas, have taken a toll on the BTL industry.

Stamp Duty Land Tax

Although first-time buyers of residential property are entitled to a land tax discount, it does not apply to a buy-to-let. In England, for every BTL property you buy, you will have to pay an additional 3% on top of the relevant Stamp Duty band.

Mortgage interest tax relief

Changes to the mortgage interest tax relief system (partially rolled out with phase 1 in 2017 but to be rolled out fully as of April 2021) could hit highly-leveraged landlords and investors hard, especially in the South-East where yields are lower and margins may be squeezed.

Section 24 of the Finance (No. 2) Act 2015, affects the relief that can be applied to mortgage interest. If you are a higher- rate taxpayer, this change will hit you hardest. As it stands, higher-rate tax relief can only be appled to 25% of your mortgage interest. The remaining 75% will be at the basic rate.

In April 2021, the interest you are allowed to claim will be reduced to the minimum.

Capital Gains Tax

Capital Gains Tax (CGT) is payable on all BTL property. The tax applies to the difference in value between the purchase price and the sale price of a property (i.e. the gains).

You are allowed an amount of gains, at this time, around £12,000, tax-free, although you can combine your allowance with that of a spouse. CGT on residential property is 28% for higher or additional rate tax-payers.

Mortgages

Buy-to-let mortgages are similar to regular mortgages but there are some important differences:

  • The majority of BTL mortgages are interest-only, which means you pay only the interest over the term of the agreement but pay in full at the end of the term
  • The amount you can apply for typically depends on the amount of rent the local market can achieve, which should be 25-30% more than the mortgage payments
  • The arrangement fees are typically higher than for a residential mortgage
  • BTL mortgages require a higher deposit
  • BTL mortgages are not currently regulated in the same way as home owner mortgages, so it’s important to seek advice from a qualified mortgage broker.
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