According to the old saying, every cloud has a silver lining, and this applies even to the buy-to-let market, despite darker skies of late as a result of changes to mortgage tax relief and reductions in landlord allowances.
This particular silver lining comes in the form of cheaper buy-to-let mortgages, even though the bank base rate went up recently for the first time in several years.
The aforementioned tax changes have reduced the overall popularity of property investment among private individuals (although not among those paying corporation tax) but not to an extent that the situation has reached crisis level. Still, fewer people are applying for buy-to-let mortgages which may force lenders to become more competitive to attract new business.
Traditionally, buy-to-let mortgages have meant bigger deposits and higher rates of interest than those offered to owner-occupiers because rental property presents a perceived higher risk to lenders. Therefore one lender, the Leeds Building Society, took the market by surprise last month by offering a buy-to-let mortgage on a two-year variable rate of 1.14 per cent, actually undercutting loans to owner-occupiers. At the time of the launch the cheapest conventional mortgage (i.e. for owner-occupiers) found on the market was one at 1.17 per cent offered by the Yorkshire Building Society, although the former required an arrangement fee of £2,499, whereas the fee for the latter was £1,495.
If this marks the start of a wider trend, it should encourage new entrants into the sector, as well as those already operating within it to increase their portfolios. In particular, it will be encouraging to savers with large sums of cash on deposit who are tempted by the rental market, but may be full of trepidation about getting involved.
Since the financial crash my own and similar property agencies have been regularly contacted by slightly nervous individuals seeking advice on a market they had once never dreamed of actually entering. Rather than risk-takers seeking to “exploit” the demand for rented accommodation, generally these are older people who say they have “had enough” of seeing their savings, built up over half a lifetime, lose their value year on year because earned interest is significantly below the official rate of inflation as described by the government (and even lower than the “actual” rate ordinary folks experience when, for example, they get their car serviced or are presented with a restaurant bill).
Not being registered financial advisors, reputable property agencies will not offer advice in this field. What they can do, however, is propose a buying and letting strategy to help investors maximise net income from rental property, even allowing for the reduction in tax incentives. Given the right choice of location (an essential factor or the investment will struggle from the start) and proper upkeep and management of the property, a 3 per cent net annual income should be attainable. This is somewhat below the 5 per cent to 6 per cent return common before the crash but it is still double the best savings rate currently available on deposit, without being locked into a five-year deal. With property, there is, of course, the (generally achievable) bonus of growth in capital value, raising the prospect of an overall net return substantially greater than cash deposits (or some stockmarket trackers, for that matter).
As to what’s available for new entrants, the market is a bit mixed. The tax changes have caused some longer-term investors to sell up and take profit from capital growth, which has led to properties being made available. On the other hand, there are also shortages caused by a boom in the unregulated short-stay market, to which I alluded last week.
Finally, a decision to enter the market should not be based solely on finance. An individual’s age, state of health, attitude to risk, professional workload and family commitments all need to be taken into account, especially when someone is a bit nervy about taking this step.
- David Alexander is MD of DJ Alexander