Buy-to-let mortgages account for a significant portion of the UK market. They made up over a fifth of new lending in the first quarter of 2016, with loans totally £13bn.. If done at the right time, a buy-to-let investment can yield substantial profits and provide financial security.
A buy-to-let mortgage is exactly what it sounds like; purchasing a property to rent out to tenants. If you’re considering getting a buy-to-let mortgage, you should think of it as a medium to long term investment. It will involve you tying up your money for a long period of time and you may not earn a profit on your investment for some time – or not at all if property prices fall and you intend to sell.
Once you have a property you can potentially earn a profit two ways. This gives property investors some flexibility should the market begin to fall or rise. The first option is dependent on rental yield and will be based on what your tenants pay in rent, minus the cost of any maintenance, repairs and agent fees. The second option is to sell your property for more than you paid for it to make a profit.
Buy-to-let investments have seen a resurgence in recent years thanks to the uncertain stock market forcing investors to look for alternatives. But is now the right time to get a buy to let mortgage?
The bad news is that Brexit has led to an uncertain future for the housing market. Coupled with the fact that buy-to-let investors now have to pay extra stamp duty, many are thinking twice about investing in property. There are positives though. Interest rates are at an all-time low and house prices so far this year have remained robust.
In June, the UK public voted to leave the EU. Many experts had predicted that such a result would have a negative impact on the UK economy – including the housing market. While a significant hit on real estate due to Brexit has yet to materialise, the outcome of the vote has led to uncertainty. This doubt means that property experts are unsure if prices will rise or fall in the coming months. All this makes getting a buy-to-let mortgage riskier, particularly if you plan to sell for profit.
On the flip side, the Brexit decision means that the government is likely to introduce a raft of measures to ensure the economy remains stable. Fortunately, for potential property investors these measures are also likely to be aimed at supporting the property market too.
This theory has already been evidenced by the Bank of England, which recently cut interest rates to an all-time low, down from 0.5% to 0.25%. While not all mortgage lenders have passed this cut on to borrowers immediately, it does mean buy-to-let investors could potentially access lower rates if they shop around.
While lower interest rates benefit those considering a buy-to-let mortgage, investors do need to be aware that interest rates will eventually rise. As a result, selecting a fixed mortgage over a tracker option could be advantageous to those seeking to buy now. The Bank of England’s Mark Carney has indicated that further interest cuts could be on the horizon later this year, signifying that a little bit of patience could pay off.
Another area that potential buy-to-let investors need to consider is stamp duty. In April, those purchasing second homes faced a 3% hike on stamp duty in an attempt by the government to somewhat curb the buy-to-let market and free up property for first-time buyers. Further to this, the basic rate of tax relief landlords can claim on properties is also set to fall to 20% from April 2017. This adds some additional pressure and expenses for buy-to-let investors. While the government is now facing calls to cut the stamp duty surcharge, these measures should be taken into consideration by potential buyers.
The good news is that while there is a climate of uncertainty within the property market, prices have remained robust this year – even after the Brexit vote. The latest figures show that in July average house prices increased by 8.4% compared to a year earlier. And while a month-on-month fall was seen, it was not as significant as expected. Figures also suggest that the volume of transactions actually increased in the lead up to the Brexit Referendum, suggesting that the outlook is not as gloomy as anticipated.
Overall the outlook for individuals that are considering a buy-to-let mortgage looks promising. However, as with all investments, there are risks and changes to policies and governmental measures that could have a large impact. As a result, it’s important for buy-to-let investors to ensure their rental income equates to around 125% of their mortgage outgoings.
Do you have any tips for buy-to-let investors?
