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07/06/19Is Buy to Let still a wise investment?

It’s often said that Brits are obsessed with property. And to some extent it’s true. We often view our home as more than just a place to live, in many cases, it’s an investment too. With this in mind, it’s no surprise that Buy to Let is often viewed as a way to boost income. However, with recent changes, is it still a wise choice?

Why did Buy to Let become popular?

Over the last few decades, Buy to Let has risen in popularity for a number of reasons:

  • Rising property prices: The increase in property prices has been huge over the last 40 years or so. Many of those that purchased a property in the 70s and 80s have seen their property deliver returns that outpace savings or investments. As a result, the number of people choosing to hold their money in property assets has increased too.
  • Increasing rental yield: As property prices have increased, so too has the average amount of rent being charged. It’s given landlords an often steady stream of income that can be increased in line with inflation to maintain spending power. Compared to alternatives, it may be viewed as an effective way to create another income stream.
  • Cheaper lending: For those new to the Buy to Let market, cheaper lending may have been a factor. Following the financial crisis, interest rates for borrowing have remained low and this means mortgage payments are cheaper, therefore, rising profit levels.
  • Property is tangible: For some investors, property is a preferred asset because it’s tangible, whilst stocks and shares, for example, are often abstract. Tangibility can help to give some certainty in their investments.

What has changed in the Buy to Let market?

Buy to Let was once seen as a great way to create long-term income with relatively little risk. However, the market has changed significantly since then. It’s important to understand commitments and potential drawbacks that go along with purchasing a Buy to Let property before diving in. So, what’s changed in the last few years?

  • Property prices: Whilst property prices have largely recovered from the dip they experienced during the financial crisis; most aren’t growing at the same pace they once were. Many parts of the country are now experiencing stagnant growth, and a few have even seen average prices fall. If you hope to invest in property to capitalise on rapid price growth, you may be left disappointed.
  • Additional regulation: The amount of responsibility landlords need to take on when letting out a property has been growing. As well as paying for repairs and maintenance, they also need to ensure gas and electric appliances are safe, with frequent checks being carried out. It’s likely that regulation will continue to grow too. For example, since 2018, landlords also need to abide by energy efficiency laws, with all new tenancies needing an Energy Performance Certificate (EPC) rating of E or higher.
  • Changes to tax relief: Changing legislation means Buy to Let isn’t as lucrative as it once was. Before April 2017, any interest payments you paid towards your mortgage could be deducted from rental income before you paid tax on it. However, this has slowly been reduced. For 2019/20, only 25% of interest payments can be deducted from rental income, and the tax relief will disappear after April 2020. As a result, the profit you can make on Buy to Let has been eroded.

Should you invest in Buy to Let?

Even with the relatively recent changes affecting how profitable being a landlord can be, there are many that are still tempted to turn their hand to Buy to Let. It may be a decision that’s right, but there may be alternatives that are more suitable. Before you start looking at Buy to Let mortgages, there are some important questions to consider:

  • Is there a demand for rental property in the area you’ve considered purchasing?
  • Do you have at least 25% deposit?
  • Will the property be able to achieve a rental yield of at least 125% your mortgage repayments?
  • Do you have the capital required to pay for maintenance or repair work if necessary?
  • How will you cover void periods when the property is empty?
  • What level of profit can you, realistically, expect to achieve?
  • Could you continue to pay your mortgage if interest rates increased?
  • What will you do when the mortgage term ends?

There’s no one-size-fits-all answer to whether or not you should invest in a Buy to Let property. You need to carefully consider your current financial situation and what you hope to achieve through purchasing a rental property. If you’re unsure if it’s the right decision for you, we’re here to offer you support.

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Robert Terry t/a High Edge Financial Planning is an appointed representative of Sanlam Partnerships Limited which is authorised and regulated by the Financial Conduct Authority. FCA No: 563682.

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