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The challenges facing the buy-to-let investor

Strong growth once seen in the Buy-To-Let (BTL) market has begun to tail off in the last two years, as the impact from a gradual withdrawal of mortgage interest tax relief, stamp duty land tax (SDLT) reform and stricter mortgage underwriting rules begins to shine through.

“TAX DOESN’T HAVE TO BE TAXING”…THEY SAID.

Before April 2017, BTL landlords were able to deduct the full cost of mortgage interest payments from their rental income, reducing their tax bill. From April 2017 and until April 2020, transitional rules allow for a gradual phase down of deductible mortgage interest from rental income before tax is applied. Private landlords will then only benefit from a 20% tax deduction for mortgage interest relief, unable to deduct mortgage interest costs against profits.

As a consequence of this change, many BTL landlords paying higher rate income tax will see the profitability of their investment fall. As shown in the table below, under the old tax rules a private landlord and 40% tax payer with a rental income of £12,000 p.a. and mortgage interest costs of £5,400 p.a. would be left with an after-tax profit of £3,960 p.a. From April 2020, net profit would reduce to £2,880 p.a.

BTL Mortgage Tax Relief Changes

INCOME

Monthly gross rental income

Assumes 40% Tax

£1,000 EXPENDITURE

Monthly mortgage interest

£450

 

Transitional Rules New Rules
2016/17 2017/18 2018/19 2019/20 2020/21 2021/22
Rental Income £12,000 £12,000 £12,000 £12,000 £12,000 £12,000
Mortgage Interest (3%) £5,400 £5,400 £5,400 £5,400 £5,400 £5,400
Deductible Mortgage Interest £5,400 £4,050 £2,700 £1,350
Taxable Rental Income £6,600 £7,950 £9,300 £10,650 £12,000 £12,000
Tax on Rental Income £2,640 £3,180 £3,720 £4,260 £4,800 £4,800
Mortgage Interest Relief £270 £540 £810 £1,080 £1,080
Tax Due on Rental Income £2,640 £2,910 £3,180 £3,450 £3,720 £3,720
Net Profit After Tax £3,960 £3,690 £3,420 £3,150 £2,880 £2,880

A simple reduction in the cost of borrowing can also make a significant difference.  In our earlier example, even under new rules in 2020/21 a reduction of 0.75% to the interest rate would help to maintain the status quo and net profit at £3,960 p.a.

As well as being able to use a residential property to secure a mortgage loan, Brown Shipley can also use a client’s investment portfolio as collateral (a “lombard facility”).  Without the need to incur valuation or legal fees and often at a rate of interest that is lower than a traditional BTL mortgage loan, the risk is borne by your investments and you remain “in the market”, able to enjoy any potential investment capital appreciation and income.  Furthermore, you are still able to deduct an element of your mortgage interest against rental income under transitional rules and take advantage of future mortgage interest rate relief under the new rules.

GOOD REASON TO STAMP ONE’S FEET…

In April 2016, the government introduced a 3% surcharge on SDLT for second homes and BTL  properties.  Basic economics dictates that as transaction costs increase, sales of BTL properties will decrease, as investors weigh up the financial merits and future capital gain opportunities against the cost of buy-in.  With slimmer profit margins to consider, it really is an old fashioned case of “caveat emptor”.

TIGHTENING THE BELT…

In January 2017 the Prudential Regulation Authority introduced stricter affordability tests for BTL mortgages.  Focus now lies on a landlords experience and track record, their wider assets and liabilities and how a new BTL property purchase and mortgage loan ‘fits in’ with the total portfolio and aggregated debt levels.  Martin Betts, Head of Credit Risk at Brown Shipley says “A portfolio of Buy-to-Let properties can often be an important component of wealth planning. We quickly develop a thorough understanding of our client’s circumstances allowing us to take a holistic view of the funding required.  Individual, tailored and considered financing is our goal, backed by a flexible and streamlined approval process to meet your needs”.

By Paul Spann, Client Director at Brown Shipley.

Source: The Business Desk

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House Price Growth Continues to Slow

The Office for National Statistics reported the lowest annual growth rate for UK house properties in half a decade, at 3.1%. This is down from 3.2% in July last year.

This follows a similar report from Nationwide last month, that put annual growth even lower, at 2%.

In July, the average UK house price was £231,000, which sits £2,000 higher than June, as prices increased by 0.3% between the two months.

The average house cost £6,000 more in July this year than it did in in July 2017.

Mike Hardie, head of inflation at the ONS, said that the overall trajectory had been impacted by a slump in London’s growth: “UK house prices continued to grow, but at their lowest annual rate for five years, driven again by a fall in London.”

Prices have fallen in the capital by 0.7% this year, according to the ONS.

The average London house will still set you back a cool £484,926, however. This is nearly four times more than the average property price of £131,505 in the north east of England.

Buyers around London are looking towards the commuter belt to find more affordable homes.

Annual property price growth in towns like Reading and Luton, which are within a commutable distance of London, has reportedly reached close to 10%, according to recent research from Post Office Money.

Chrysanthy Pispinis spoke for the lender: “With first-time buyers increasingly citing location as an area they are willing to compromise on, it follows that buyers have been looking for more affordable yet commutable options.”

The north west of England has experienced the fastest growth in property prices. Annual price growth for properties in the region stood at 5.6% in July.

Housesimple.com CEO Sam Mitchell commented on the findings, saying:

“These latest figures confirm what we already know, that the North-South divide has been turned on its head.

While property prices in the North have a spring in their step, driven by inward investment, thriving regional business hubs and a buoyant jobs market, London price growth is in reverse… many of the transactions going through at the moment are down to sellers accepting offers a fair bit below the asking price. Sellers and agents need to adjust their price expectations if they want to attract buyers.”

Paul Smith, chief executive of Haart Estate Agents, advised against Brexit ‘hysteria’, denying claims that the figures indicate a future property crash.

He said: “The hubbub around Brexit has reached fever pitch over the last couple of weeks, but aspiring buyers, home sellers and investors must not bow to the hysteria and remember the fundamentals of the market remain the same.

“House prices across the UK have risen by 31pc in the last 10 years alone, and in some areas across the West Midlands and the North West today prices have risen by almost 20pc on the year.  Hardly an indication that we are heading for a house price crash.”

Source: Money Expert

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Buy To Let Investors Losing Money Selling Empty Properties

Buy to let investors are potentially losing £500 million collectively as they are encouraged to sell their property investments empty and tenant free.

New figures from buy to let marketplace Vesta have revealed that over half a billion in rental income is lost due to private landlords evicting good tenants due to the belief that they need to sell their properties empty. This can lead to the average landlord losing over three months rent as a result of evicting tenants in order to sell.

Loss to a single private landlord with just one home to sell can amount to £2,757 or even £5,514. The total loss to Britain’s private landlords can reach £551 million – £1.1 billion.

In addition to losing landlords money, this practice causes distress to long-term tenants who are forced to find alternative accommodation. Creating longer tenancies has been marked as a goal by the government. The latest industry figures have suggested that up to 380,000 private landlords could sell their properties empty, leaving many families displaced.

Vesta’s Chief Executive, Russell Gould, commented: ‘The practice of landlords evicting perfectly good tenants when they want to sell their property is outdated in this day-and-age and highlights that the sector is long overdue for reinvention and transformation. You really have to question a process that loses rental income for the seller whilst putting the tenant through huge amounts of stress and cost when it is totally unnecessary. Until we adopt a different approach, the problem for both landlords and tenants will only get worse.’

He continued: ‘Forecasts suggest that 380,000 private landlords are planning to sell their properties in the next 12 months resulting in thousands of tenants facing unnecessary evictions. We want the buy to let sector to realise that there are viable alternatives to the traditional model that are both socially responsible and financially beneficial to investors, landlords and their tenants.

Source: Residential Landlord

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Younger landlords more pessimistic about Buy To Let, despite opportunities

UK landlords are divided along generational lines over the future of the buy-to-let sector and whether to stay the course or sellup, new research suggests.

Overall, some 56 per cent want to keep or buy more rental properties, but 44 per cent are looking to sell, according to data from investment firm Octopus Choice.

Millennial landlords are more inclined to sell than stay, with 65 per cent planning to sell one or more of their properties. This compares to 29 per cent of those aged 55 and over. Younger landlords are also more likely to admit that managing a buy to let has become a hassle with 81 per cent doing so compared to 39 per cent for investors over 55.

The biggest annoyance cited by millennials is dealing with onerous tax returns, while older generations blame high one-off costs.

Some 87 per cent of millennials admitted that they underestimated the costs involved, including repairs and upkeep, insurance and initial legal and conveyancing fees, compared to just a third for those over 55.

Among those looking to exit the market, some 24 per cent blame falling yields while 23 per cent say it is due to tax changes and 19 per cent are put off by cooling house prices.

Some 60 per cent say that property management had become a burden and 61 per cent had underestimated the costs involved.

Sam Handfield-Jones, head of Octopus Choice, said: “The hassle and cost of buy-to-let is a source of growing frustration, and some landlords may find that their once reliable day to day income is becoming harder and harder to come by.”

But this isn’t the case across all parts of the market, with money still to be made from the right property in the right location, he pointed out.

He added that London landlords face the toughest choice, with falling yields and slowing house price growth set to reduce profits.

An analysis by the firm shows that typical buy to let properties in London cost landlords over £1,250 per annum for the first five years and an average London house worth £475,000 would have to be sold for £590,000 eight years later, just to break even, even taking into account the income over that eight year period.

While London hotspots can still be found, such as Tower Hamlets, Barnets and Hackney, three quarters of landlords in the capital think investing in buy-to-let will be less worthwhile in five years time, more than any other area.

In Scotland and the East Midlands, it’s a different story with Scottish landlords enjoying average annual returns of 8.8 per cent on their investment over an eight year period, while those in the East Midlands only return 8.2 per cent.

Handfield-Jones added: ” Against this backdrop, its not surprising that some investors are seeking alternative ways to indirectly invest in the property market.”

“For those looking to leave, there are growing numbers of ways to keep one foot in the door”

Richard Truman, Head of Operations at Simple Landlords Insurance added ” Our own research into the ’emerging landlord’ sees landlords in general getting younger. Perhaps what were seeing here is the difference between the small, accidental landlords, and the larger professional landlords. And it;’s a gap thats widening.

Those getting into property investment to make a quick hassle-free buck, and who haven’t done the due diligence, research and number crunching , are going to find things tough in today’s market.

Those investing for the long term, clear on their strategy and goals, looking to grow, and savvy about the market challenges and opportunities- those are the landlords winning at property, and confident about the future.”

Source: Simple Landlords Insurance

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Property investment: the four property types you should avoid

When it comes to property investment, I always emphasise the need to have personal goals.

What you want to achieve from your property journey will be different to another investor and, as such, the type of investments you put your money into will differ too.

That being said, there are some investments that I wouldn’t recommend to anyone.

Student pods

You buy a room within a purpose-built student block and rent it out to students. Many will come with a guaranteed rental return for a period of one or two years. What’s not to love?

Well, lots actually. Firstly these pods are almost always overpriced, that guaranteed return you’re getting will have been factored into the asking price.

Secondly, the resale market is virtually non-existent. You can only sell to other investors. And your tenant market is also severely limited.

Finally, there is very little possibility of capital growth. Prices will only rise if yields do.

Student apartments can be a terrible investment (image: PA)

Hotel rooms

Hotel room investments are similar to student pods.

You buy a hotel room, a management company rents it for you, and you get a return. It’s a hands-off investment – which can be many attractive to investors.

What’s not so attractive, of course, is the fact these too have a capital growth issue and a distinct lack of a resale market. What’s more, you’ll be hard pushed to find a lender willing to lend to you on such an investment.

Think twice before investing in hotel rooms (image: Shutterstock)

Overseas ‘hotspots’

I’m certainly not suggesting overseas investments are a bad idea in general. However, you should be wary of areas marketed in a particular way.

We’ve seen what happens when marketers get overexcited. A few years ago Bulgaria and Spain were the locations what we’re heading for a boom; prices were going to soar, so investors and developers had to get in quickly. And now? Prices have plummeted in both countries, and thousands of homes stand empty.

Be cautious around claims of price rises. Do your own research, don’t focus too much on price, look at yields and, as ever, consider the fundamentals of the area.

Overseas properties can be prone to hype (image: Shutterstock)

Bargain properties

It is certainly possible to get a property bargain.

If you’re able to have other points of negotiation, you could get a great deal on a property. But if a property price seems too good to be true, assume that it’s not and do your research.

There’s very little point in buying a family house to rent out – even if you get it for rock bottom price – if nobody wants to rent it!

Check the rental market, the local amenities, the employment opportunities before getting carried away by a bargain.

By Rob Bence

Source: Love Money

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Social care funding needs prompt buy-to-let demand

There has been increased demand for buy-to-let products among those looking to fund social care, according to Retirement Advantage’s Alice Watson.

The head of product and marketing at Retirement Advantage said the delays which had plagued government action on social care funding meant the company had not been able to dedicate resources to exploring new products to address this issue.

But she said Retirement Advantage’s clients had been using its buy-to-let product to fund social care as an interim solution.

Ms Watson said: “Say you have had a homeowner who has just moved into long-term care and the family cannot afford it, because it is really expensive. They can put tenants into the property, rent it and release money from us.

“They are still getting that monthly income from the tenants so they have got the capital and the monthly income.”

Retirement Advantage currently offers two over-55 buy-to-let products which offer annual interest rates of 6.16 per cent and 6.36 per cent.

The Department of Health & Social Care had been due to publish a green paper on the funding of social care last year but it has been delayed several times and is now expected in the autumn.

This was just the latest delay to hit the government’s policy on social care funding, with a proposed cap on the cost of care due to come into effect in 2016 but delayed until 2020 because it would have been too expensive.

The cap may be revived as part of the government’s green paper but a number of other proposals have been floated, including an auto-enrolment solution which would see adults saving into a national fund to cover their care costs later in life, a Care Isa savings product exempt from inheritance tax, and a care pension, which mixes drawdown and care insurance.

Ms Watson said: “We wouldn’t look to invest too much in creating social care products at the moment because if we were to spend X months developing it the government could undercut it.

“Care needs to be funded in a slightly different way from many points of view. You need a really flexible product.”

She said flexibility was important because people’s care needs could change suddenly and dramatically over time.

Source: FT Adviser

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Study finds standards have improved in rented homes in Britain

Standards have improved in rented properties in Britain but safety, particularly relating to gas and fires, still falls short, according to new research.

Over the past four years, during which time there has been a raft of new legislation relating to the private rented sector, there have been significant leaps forward in landlords’ professional standards, but safety is still compromised in too many rentals, says a report from insurer AXA.

It points out that the sector still has catching up to do on important areas like fire and gas safety. Every rental property requires an annual gas safety inspection but just 58% have had this check in the past 12 months.

Four in 10 tenants say they do not have smoke alarms installed, despite landlords being legally required to fit them on each floor of a property. This is still a marked improvement on 2014, prior to the rule being introduced, when six in 10 tenants lacked them.

Two other key requirements are that landlords provide an Energy Performance Certificate (EPC) to tenants, and in England and Wales the Government’s ‘How to Rent’ Guide, which informs them of their rights and responsibilities.

Yet only a third of tenants say they have seen the EPC, up from 19 in 2014, and just 15% of those eligible have received the Government’s mandatory guide.

AXA notes that landlords compromise their rights with these omissions, as those who have not provided the guide, EPC and gas safety certificate cannot evict a tenant under a Section 21 notice.

While recent legislation has increased pressure on landlords to raise their game, there is still little awareness among tenants of basic rights and entitlements. This means vital consumer pressure to push standards up further is largely absent.

Some 75% of tenants did not know their landlord is legally required to ensure a minimum energy rating for the property, and a similar number were unaware of the requirement for EPCs and gas safety checks. Most, some 89%, said it was the tenant’s responsibility to keep any chimneys swept too which is untrue as this is the landlord’s responsibility.

Last year, AXA found that one in 20 rental properties were still rated F or G for energy performance, categories now outlawed from the rental market. This has now fallen to three per cent of properties in the, equating to 150,000 properties nationwide.

Seven in 10 rental properties are now A to C bands for energy performance, but ‘cold hazard’ is still rated the number one health risk associated with living in private rented accommodation.

Indeed, half of tenants surveyed said they feel their rental property negatively impacts their health and poor energy performance was quoted by 21%. Most tenants in this group also cited damp or out of date heating systems at the same time.

Change is afoot, however, as AXA’s latest figures on energy saving features in the private rental sector show that landlords are upgrading their properties at a rapid rate, with figures jumping on smart meters in particular.

It also found that 78% of properties now have full double glazing, up from 73% last year, 26% have smart meters installed, up from 14% in 2017 and 34% have roof insulation, up from 32%.

‘Landlords are getting more professional, and we are seeing standards rise in British rentals, driven by legislation and desire of landlords themselves. We know that many start out as accidentals, and there is a big learning curve for them at the start, particularly as legislation changes so often,’ said Gareth Howell, managing director of AXA Insurance.

‘We find that both landlords and their tenants lag behind, so public awareness campaigns are vital to correct myths and promote new rules and standards. Gas and fire safety should be the priorities here: our research suggests that millions of properties are not compliant with today’s laws,’ he added.

Source: Property Wire

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Annual price growth in Scotland at 3.9% is almost double that in England and Wales

Property prices in Scotland increased by 3.9% in the 12 months to July 2018, more than double the rate of growth recorded in England and Wales, the latest index data shows.

The average price is now £181,075 and Edinburgh and Glasgow accounted for a third of Scotland’s increase on a weight adjusted basis, according to the Your Move index.

However, on a monthly basis, prices in Scotland fell for a third consecutive month in July, dropping 0.4% but the index report says that while price growth has slowed in Scotland, the market continues to be supported by low interest rates and more affordable housing than most regions in the UK.

A breakdown of the figures show that prices in Edinburgh were up 4.6% annually to a average of £266,614, while growth in Glasgow was 4.1% to £159,700.

But overall growth was led by the Shetland Islands, at 14.6%, with increases across all property types, but particularly in detached properties. On the mainland, prices in West Dunbartonshire, which has direct trains to both Glasgow and Edinburgh, have increased 12.6%, boosted by sales of high value properties over £300,000.

West Lothian, another major contributor to the market, meanwhile, has also recorded double digit annual growth, with prices up 12%.

On a monthly basis, increases are led by Stirling, with prices up 3.7% in July to £208,077. It was one of two areas to set a new peak price in the month, with Renfrewshire the other. Prices there increased 1.4% in the month and are up 8.5% annually to reach £156,619.

When it comes to prices falls, the biggest are in East Ayrshire, the second cheapest area in Scotland, which has seen prices drop 3.1% annually, while the second biggest drop is in East Renfrewshire, the second most expensive area in the country where prices fell by 1.3%.

‘The market in Scotland is holding on. While everything is notably slower, almost all areas continue to show annual growth, and drops still remain modest,’ said Christine Campbell, Your Move managing director in Scotland.

Source: Property Wire

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Housing market remains flat as year-on-year property deals tumble

The number of properties being bought and sold in the UK suffered an annual 2.6 per cent drop last month, signalling the latest evidence that activity in the country’s housing market remains flat.

While total property transactions climbed 1.3 per cent between July and August to 99,120, today’s figures also show a 2.6 per cent dip compared with the same month last year, according to HM Revenue and Customs (HMRC).

Kevin Roberts, director of Legal & General Mortgage Club, said: “Property transactions have remained stagnant for some time now. Financial barriers, like Stamp Duty, are discouraging homeowners from moving up the ladder and instead choosing to ‘improve, not move’”.

At its pre-financial crisis peak the housing market was hitting roughly 150,000 transactions per month, which was followed by a sharp fall in residential transactions at the end of 2007, coinciding with the housing market slump and credit-crunch.

Jeremy Leaf, north London estate agent and a former RICS chairman, said: “These numbers show that the patient is in reasonable health and has taken the interest rate medicine in its stride, showing activity holding up reasonably well and even progressing marginally compared with previous months.

“The market enters the important autumn period with reasonable confidence, not expecting any great changes either way. On the high street we have noticed more interest in buying and selling, although we are finding it hard for deals to gain traction unless there is realism on all sides.”

The news comes in the same week as Office for National Statistics data found that house prices in London plunged to their lowest rate of growth in nearly a decade in July, falling 0.7 per cent as the capital’s property market shows little sign of easing up.

Source: City A.M.

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Fifth of homebuyers seek mortgage alternatives

Alternative finance, including crowdfunding, mezzanine finance or unregulated loans, was used by 19 per cent of home buyers in the past decade, research has found.

Research commissioned by bridging lender Market Financial Solutions, found 52 per cent of borrowers used a mortgage or remortgage to finance a property purchase in the past decade and 42 per cent had purchased using cash.

Alternatives were the least popular options, with bridging considered by a mere 13 per cent of homebuyers. However, alternative finance was used by a respectable 19 per cent of borrowers.

The lender had surveyed 2000 residential homebuyers who had a bought a property in the last ten years, with a quarter of the sample owning two or more residential properties in the UK. About 37 per cent of homebuyers had sought advice from a broker when considering their funding options.

It found 46 per cent of homebuyers felt they did not have the knowledge or confidence in alternatives beyond mortgages to choose them.

The lender claimed homebuyers were restricting their ability to find funding because they lacked the confidence to consider alternative finance options.

Paresh Raja, chief executive at Market Financial Solutions, said: “To remain reliant on the mortgage market could restrict an individual’s ability to get the funds they need.

“Indeed, in the UK’s competitive property market, it is essential that buyers are aware of the financial products they can choose from, in turn putting themselves in the best position to progress with a purchase quickly and efficiently.”

Mr Raja added: “Over the past decade, a range of new alternative finance products has arisen to give buyers different options that might be better suited to their needs – however, today’s research demonstrates that there remains a lack of understanding about what these options are and how to use them.”

But Ruth Whitehead, financial adviser and director at Ruth Whitehead Associates, said she was pleased that bridging loans remained a minority pursuit, considering them an expensive option that should be used as a last resort.

She said: “Traditionally their function has been to ‘bridge’ the gap between sale and ongoing purchase, if the sale process is too slow. However, in the current market in London, which is significantly affected by the uncertainty around Brexit, this situation rarely obtains.

“Property values are going down, and it’s better for a purchaser to complete on their sale, bank the proceeds and then couch-surf while looking for a property to buy without a chain behind them – bridging loans are only ever intended to be short term, and are extremely expensive.

“They have some applicability to a shrewd property investor who can afford to take the risk of not being able to raise the finance to pay off the bridging loan, but for our clients buying and selling their main residence, the word ‘bargepole’ springs to mind.”

Source: FT Adviser