Buy-to-let was one of Britain’s best-loved investments before crippling tax blows caused many landlords to lose interest.
But now buy-to-let has been thrown a lifeline. Slashed stamp duty, better mortgage deals and new tax benefits all mean landlords are flocking back to the market.
However, with unemployment predicted to soar to four million by the end of the year, lenders are not taking any chances.
Here, we tell would-be landlords all they need to know…
Incentive: Sofia Jones began investing in houses six years ago and now owns four buy-to-let properties near her home in Buckinghamshire
Surprise stamp duty savings
Buy-to-let broker Mortgages For Business saw a record 4,000 extra visits to its website within hours of Chancellor Rishi Sunak’s stamp duty break announcement on July 8.
Online property portal Zoopla also recorded a 15 per cent rise in investors looking to buy homes, while online estate agent, Strike, in the North of England, saw an increase of between 10 per cent to 15 per cent in buy-to-let mortgage enquiries.
Yet many landlords had been poised to snap up more properties in anticipation of falling house prices in the pandemic.
Three in ten property investors re-mortgaged existing buy-to-let properties between April and May to release cash ready to go on a spending spree, according to Mortgages For Business.
I’m investing in a fifth rental
When Sofia Jones heard the stamp duty holiday would be extended to landlords, it was all the incentive she needed to buy her fifth property.
She began investing in houses six years ago, and now 29, mother-of-one Sofia owns four buy-to-let properties near her home in Buckinghamshire, and just last week had an offer accepted on a £410,000 house that she plans to convert into two flats.
Thanks to the stamp duty holiday, Sofia’s tax bill has been slashed from £18,350 to £12,300.
Sofia, who owns a mortgage advice firm in London, says: ‘I wanted to bring in a partner to buy my next buy-to-let but hadn’t got round to it. When the stamp duty holiday came in, I thought right I’m going to do it.’
As a mortgage adviser, Sofia is aware that banks were carrying out stricter checks on landlords’ own earnings.
‘I have all my accounts ready for the bank,’ she says, ‘but it is not a check I would normally expect my lender to make.’
And Sofia is now considering moving all of her properties into the limited company before the tax freeze ends on March 31.
So when the Chancellor raised the threshold at which homebuyers must pay stamp duty from £125,000 to £500,000, they were quick out of the blocks.
But landlords still have to pay an additional 3 per cent surcharge. It means a landlord purchasing a home worth £300,000 would now pay £9,000 in stamp duty instead of £14,000.
Alan Cleary, managing director of buy-to-let lender OneSavings Bank, says: ‘For an area of the market that has seen tightening regulation and increased taxation over recent years this is welcome news and our teams have already reported an increase in interest.’
Some landlords are so desperate to cash in on the stamp duty saving that they are taking out a government bounce-back loan, worth up to £50,000 to use as a deposit.
Most banks will refuse to loan to buyers borrowing in this way and ask for proof of the source of the deposit.
But brokers say investors are disguising the funds by paying the loaned money into their companies and then withdrawing it as a director’s loan.
In Scotland, the threshold at which you begin to pay land and buildings transaction tax (equivalent to stamp duty) has increased from £145,000 to £250,000.
As in England, the temporary change applies to second-home owners and buy-to-let, but they too will still have to pay the additional homes tax, which is 4 per cent in Scotland.
In Wales, stamp duty has been removed for home purchases of £250,000 or less. Second-property owners and landlords will not benefit from the tax holiday.
Some beefed up mortgage deals
Specialist lenders have also now launched a raft of new mortgages for landlords.
Landbay increased its maximum loan size from £1 million to £1.5million and lowered its deposit demands.
The firm says it expects ‘savvy landlords to exploit the low-interest-rate environment and stamp duty holiday to the full’.
Other small lenders have now reinstated their buy-to -let ranges after withdrawing them during lockdown.
Hampshire Trust Bank increased its maximum loan size, while Foundation Home Loans cut its rates. Yet High Street banks have been more subdued in their response to the tax break.
TMW, part of Nationwide, withdrew some of its specialist buy-to-let mortgages and upped rates on others.
Barclays has yet to bring back buy-to-let mortgages for landlords who buy properties through a limited company, after withdrawing them in June. Santander continues to ask landlords for a minimum deposit of 25 per cent, instead of its typical 15 per cent sum.
Prepare for fierce bidding wars
With a shortage of homes on the market, bidding wars are breaking out.
Buyer demand quickly rebounded once the house market reopened in May, according to Zoopla.
But sellers have proceeded with caution because of predictions that house prices could plummet.
Landlord Vishal Vyas buys properties to rent in the North East, where house prices are low. He says he has seen a surge in demand for cheap homes that need renovation, creating fierce competition among landlords.
With the properties mostly priced below the previous £125,000 stamp duty threshold, buyers won’t save any money.
But Vishal, 28, an accountant from East London, thinks investors saving money on other pricier purchases now have spare cash to spend on the bargain properties he targets.
He says: ‘I was planning to purchase my next property just before lockdown but had to cancel my trip up North.
‘I’m back on the hunt but am finding that the homes I usually buy are selling so fast I can’t even get a viewing.’
Target locations where rents are rising
The North West is now the strongest rental market in the country, according to estate agent Hamptons International.
Rents rose a record 5.2 per cent in June year on year. And for every available rental property, 12 tenants are applying to visit.
Inner London, on the other hand, has seen a 7.4 per cent decline year on year in rents because of fewer international tenants, and families fleeing the capital during lockdown.
And while popular student areas once offered solid opportunities for landlords, experts fear they may have lost their shine.
Steve Olejnik, managing director of Mortgages For Business, says: ‘The Government wants to get education back on its feet in September, so the market should start to recover in the late summer when students return.
‘This could offer a good opportunity for brave or long-term investors, but with a second wave of Covid-19 speculated to arrive in the autumn, it would be an investment not without risk.’
In Scotland the highest return on a buy-to-let investment can be found in the areas of East and North Ayrshire, according to Zoopla’s analysis of June rents.
A two-bedroom property can be snapped up for £70,000 and the average monthly rent is £450, offering a yield of 7.71 per cent.
Inverclyde and Glasgow offer a return of 7.67 per cent and 7.6 per cent with two-bedroom properties costing around £74,500 and £125,000 respectively.
Save cash on your tax bill
Some experienced investors are seizing the stamp duty cut to transfer properties they already own into a limited company.
In a clampdown on property investment in 2016, an additional 3 per cent stamp duty tax was charged on all purchases of second homes and buy-to-lets.
Landlords were also barred from deducting mortgage interest from their profits in order to lower their tax bill.
However, those who hold properties in a limited company are still able to benefit from the tax break.
The landlord will also pay corporation tax at 19 per cent instead of income tax at 20 per cent for basic-rate taxpayers and 40 per cent for higher-rate ones.
It is also easier to change the ownership of a property within a company than one held privately.
This could protect you from the stamp duty, capital gains tax or inheritance tax liability.
If you own investment properties in your name, you are permitted to move them into a limited company.
But as it is considered you are technically selling and re-buying them, you will face a capital gains tax and stamp duty bill.
The stamp duty hiatus could save thousands for landlords.
Moving a £500,000 buy-to-let into a limited company would now cost £15,000 in stamp duty rather than £30,000.
Mortgage rates on limited company deals are more expensive than standard buy-to-lets. Legal and accountancy fees can total £1,000. If you are on a lower income, the tax changes may not be worthwhile.
Why not try let to buy
Savvy investors in wealthy areas are turning to sophisticated mortgage deals to save thousands in the stamp duty break.
Bob Singh, of West London broker Chess Mortgages, says one in four enquiries he has received have been from homeowners looking to transfer their existing property into a limited company to rent out and then buy somewhere new to live.
You can use a let-to-buy deal to release enough equity to buy a new property to live in. And there will be no capital gains tax to pay when you sell your original home because it is not classed as investment property by the taxman.
Plus, your limited company will only pay the 3 per cent stamp duty surcharge on the purchase.
Mr Singh says: ‘The main benefit of this type of transaction is not being in a chain when you come to buy your new home.
‘You have raised money for your deposit by remortgaging your previous home so you can move quickly to snap up a property in this competitive market.’
It is not all good news for landlords, however. Many tenants are already in serious financial difficulty because of coronavirus.
In April around 1.7 million renters said they expected to lose their jobs within three months, according to charity Shelter.
Citizens Advice reported a 330 per cent increase in visits to its website page ‘dealing with rent arrears’.
Lenders, therefore, want to know that landlords will be able to keep up with mortgage repayments if tenants stop paying rent.
A government ban on evictions, imposed at the start of the pandemic to protect tenants from losing their home, ends on August 23, which means landlords will no longer be forced to pick up the bill unless it is extended.
Before the virus, banks based lending decisions on how much rent the property would bring in.
But they are now scrutinising landlords’ own finances, including earnings from their day job.
Some lenders are even asking landlords to prove they have a back-up fund to cover missed rent.
Many banks are turning down landlords who have accepted financial support from the Government during the pandemic, such as a mortgage payment holiday or a bounce-back loan.
Experts warn that, while the stamp duty holiday has made buy-to-let attractive in the short-term, the boom may be short-lived.
Steve Olejnik says: ‘Landlords will rush to buy homes before the stamp duty holiday ends in March next year, after which I think there will be a natural drop in activity.
‘The UK is bracing itself for a slowdown in the economy, so I think it will be 2022 before the market rebounds again, assuming the taxman has no more nasty surprises.
‘It may never be the golden goose it once was, when amateur investors made easy money, but for the professional landlord, buy-to-let is still a profitable venture.’
It’s just not for the faint-hearted
Not even a pandemic can cool Britain’s love affair with bricks and mortar.
If you believe even half of what estate agents say, we are in the midst of a mini housing market boom as buyers look to cash in on the stamp duty cut.
Not content with one property, many dream of building an empire — perhaps starting with a house for the children to live in while at university.
The idea is that the rent keeps the place ticking over, while house price growth will provide a nice little nest egg for the future.
But when George Osborne waged war on second homeowners in 2016, it meant the end of the buy-to-let gravy train for many wannabe amateur landlords who do not have the expertise or extra cash now needed to invest.
The recent stamp duty cut is the first glimmer of hope for those set on becoming second-home owners.
But buyer beware. You will still have to pay some stamp duty and your profits will be hampered after generous tax perks were whittled away.
With unemployment predicted to hit four million by the end of the year, you must also be sure your finances could take the hit if your tenants suddenly can’t pay the rent.
The future of house prices is also uncertain. And even if they do stabilise, it’s unlikely you’ll benefit from the same meteoric rise as we’ve seen in recent decades.
Far from being an easy money-spinner, a buy-to-let business can also be hard work.
If you don’t live near your second home or have a demanding job, you’ll need to hire a managing agent to find tenants and handle broken boilers — which could wipe out your profits.
You also need to be sure you won’t suddenly need easy access to your cash as there is no guarantee you’ll be able to sell quickly.
So while there is money to be made from property investing — it’s just not for the faint-hearted.
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