History of Buy-to-Let property investment in the UK
Over the last 40 years or so UK residential property values have steadily increased and given people who purchased their own homes a very favourable long term return. It has been against this value appreciating background that since around 1996, people started to seriously purchase property to rent out. For ordinary people not used to investment, property has always been viewed as a very secure place to put your money and for many the opportunities that were afforded appeared irresistible. Lenders supported this new trend and the buy-to-let (BTL) market was born.
Prior to the credit crunch of 2007/2008, obtaining finance for investment property purchase was relatively easy process and many people quickly amassed quite large numbers of investment properties to rent. In those days, property could be purchased with deposits of as little as 15 percent of the property value and buy-to-let mortgages (BTL)were easily accessible and were based mainly on the rental yield of the property without any reference to the purchasers income and credit history. If the monthly rent could be shown to be 1.25 times the monthly mortgage payment then the loan was generally approved.
After the credit crunch, lender criteria tightened and deposit requirements generally rose to 25 percent where they sit today. Where people had acquired large numbers of properties that had all been financed at the low deposit rate some now found themselves in difficulty as they did not have the cash to support the new deposit levels and in some cases their lenders started to call in part of the loans causing them to sell some of their properties. However the vast majority of the new buy-to let landlords were not troubled by this set back and they have continued to expand their portfolios till the present day.
Today there are around 5 million buy-to-let properties in the UK and they contribute greatly to the security of 5 million families who are unable to afford to purchase homes of their own and need good rented accommodation.
The current market
In the budget of 2015, the then chancellor of the exchequer George Osborne introduced a series of tax changes which were intended to slow the growth in buy to let property ownership. The aim was to slow the rise in property values and to release property for private residential ownership that would otherwise be snatched up by landlords. Some of these tax changes were:
- Stamp duty – Stamp duty is a tax on the price paid for a property. It is a tiered system and applies to all residential and buy-to-let property purchased in the UK. Essentially what was done was to increase the rate of stamp duty on second property purchases by 3 percent on each band rate. This additional stamp duty charge will apply to each and every additional property purchased over the residential family home.
- Mortgage interest – Prior to this change, landlords could hold portfolios of properties and operate them privately but be able to offset certain costs against tax. Where they had outstanding mortgages on their property they could offset the cost of the interest charged against the rental income of the property. This was a great boon to higher rate taxpaying landlords but sadly no longer applies.
During this period, lenders had been coming under serious pressure from the financial conduct authority (FCA) to tighten their lending criteria and although buy-to-let mortgages are not as yet regulated, these restrictions have been applied. What this means is that mortgages are now much more difficult to obtain and investors who often believe that they can easily afford the mortgage payments required can feel very frustrated when their applications are rejected by the lender.
Below are outlined some of the rules that mortgage lenders may apply.
- Rent to mortgage repayment ratios – Many lenders now apply a nominal calculation rather than the true calculation to assess if rental income is sufficient to service the mortgage loan on a property. What this can mean is that if the true interest rate on a loan is say 3.5 percent and previously a ratio of 1.25 would have applied, now lenders might apply an arbitrary interest rate of 5.5 percent to the loan and apply a factor to the monthly repayments of 1.45. An example of a loan of £100,000 is shown below.
|Previous calculation||Todays calculation|
|Monthly mortgage payments||£291.66||£458.33|
|Rental income required from property||£364.57||£664.57|
What this means is that care must now be taken to balance the properties potential to attract rental yield with the size of the required mortgage loan.
- Interest only mortgages – Traditionally investment property was purchased on interest only terms as this kept the mortgage payments well below the expected rental income and allowed the property to be self-funding while using the property value to rise and easily repay the loan at the end of the mortgage term. Although interest only mortgages are still available for investment properties they are now quite restricted and lenders are pushing towards repayment mortgages. This means that together with the tax changes mentioned above, achieving a self-funding position on rental income is becoming more difficult.
- Affordability – Where in the past lenders would simply offer a mortgage on the basis of rental income, they often now want proof that a landlord will be able to maintain the loan repayments should adverse situations like long vacant periods arise. To do this they have introduced affordability criteria checks that take account of the lifestyle of the property investor and look at their income from other sources and the number of other properties owned and mortgaged.
There are many other criteria issues that can arise and no two lenders apply exactly the same criteria. This is where the property investor will benefit greatly by engaging with an experience mortgage adviser to guide them through these problem areas. At expatriates.co.uk we have partner companies that can guide you through these difficult areas and we recommend that you engage with them while you are only considering making a purchase rather than at the last minute where you have committed yourself. This way you can avoid disappointment or worse, commit to a purchase that you cannot finance. Looking to the futureAccording to a recent survey published by the Royal Institution of Chartered Surveyors (RICS), the UK is facing a critical shortage of property which is available for rental. The report goes on to explain how and why rental demand in the UK will increase by 1.8 million households by 2025.Against this background and taking account of the current demands on the UK government to invest in house building to help alleviate the current severe shortage of residential housing, it would appear fair to assume that property values and rental yields will continue to rise for the foreseeable future.According to figures issued by the council of mortgage lenders, the number of buy to let property purchase made last year has dropped by 50% on the previous year, as a result of the budget tax changes. This drop in purchasing would tend to conflict with the (RICS) statement and may give investors some concerns. However, like most things in life, nothing stays the same for very long and as other factors start to take affect or the result of an action does not turn out the way we expect then further changes will usually made.The property investor of tomorrowProperty investment may now begin to follow other forms of investment where the successful investor will be the one who takes the time to properly survey the market and understand their reasons for making that particular investment. Some things to consider are:
- Reason for buying an investment property – Once you have honestly defined your reason for purchasing investment property you will be in a good position to do the correct research that will be required to ascertain accurately if the outcome you want is achievable.
- Property location – Where the property you intend to purchase is located will have a future effect on how its value will grow over the years. Just look how London properties have escalated in value against properties located in the north east of England to see what we mean. Obviously factors such as easy access to your property for maintenance will come into play but nevertheless, paying attention to where it is located can be vital.
- Property type – Most areas will hold a full range of property types from high rise flats to large detached houses and will include new build properties and properties that can be purchased off-plan. Making the choice will depend on a number of key requirements such as the type of tenant you want to attract, your ability and availability to carry out maintenance work on the property or have the skills to plan and execute renovation projects.
- Tenants – Having established the type of tenant you wish to attract you will need to make sure that the area you choose holds that type of tenant and has the capability to attract them in the future.
- Taxation – Having established your intentions of what you want to do, it will be time to look at how tax will be applied. If you are registered for tax in the UK, an early consideration will be how the proceeds of this investment will sit with your current income position with particular regard to basic rate and higher rate tax thresholds. Having considered that, it would then be prudent to measure that outcome against establishing a limited company to hold your property and compare the two taxation parameters to give you the best outcome.
Footnote: This guide only touches on the various aspects of the things a property investor should consider. Reading the attached guides and referring to the various calculators will open your mind to further research of the things that you will want to understand to ensure you achieve your intended goal.At expatriates.co.uk we wish you every success with your venture and if we or our partner companies can assist you in any way, please leave a simple enquiry and we will respond to you.