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Buy-to-let mortgage rates hit an all-time low thanks to market slump

Investing in property? Find out how to take advantage of the slow market

The number of homes bought by landlords has dropped by a third over the last three years, after a series of tax reforms knocked investor confidence. But with buy-to-let mortgage rates hitting an all-time low and less competition in the market, could now be the time to jump in?

Landlords are buying 30% fewer homes than three years ago, new research from Hamptons International shows. This follows a series of regulatory changes – including a stamp duty surcharge and changes to mortgage interest tax relief – that dragged down landlord profits.

Yet as activity quietens, lenders are increasingly trying to woo landlords with attractive low-rate deals.

Which? looks at the current trends in the buy-to-let market and explains which factors you need to consider before investing.


Buy-to-let activity slows

Over the past three years, there has been a dramatic drop-off in the number of properties bought by buy-to-let landlords.

In the first half of 2018, landlords across Great Britain bought 64,260 properties, the Hamptons research shows – 13% less than the same period last year, and a third less than in 2015.

Our graph shows how the number of purchases by landlords has decreased over time.

Interestingly, all regions and nations in the UK have seen the same trend (with the exception of Northern Ireland, for which no data was released).

But some areas were hit worse than others. The South East saw the greatest drop, with the number of purchases falling by 45%, followed by Scotland with a 44% drop-off, Hamptons International reported.

By contrast, activity in the North East fell by a comparatively modest 16% – though this still represents thousands of properties.

Why are landlords buying fewer homes?

The buy-to-let sector has faced numerous challenges in recent years, which could be be dampening landlords’ enthusiasm for expanding their portfolios.

From April 2016 onwards, landlords buying new homes had to pay an additional 3% on the normal stamp duty rates. This means that, on the average purchase price of a buy-to-let property – £174,580, according to Hamptons – landlords would pay an additional £5,238 in tax.

The following year, changes were introduced to mortgage interest tax relief. Pre-tax deductions on mortgage interest are gradually being phased out and replaced with a 20% tax credit by 2020. Higher-rate and additional rate-payers are likely to end up with a heftier tax bill as a result.

The wear and tear allowance was also scrapped in April 2017, and landlords are now limited to deductions for like-for-like replacement of furnishings.

Since 1 October, an increasing number of rental properties have fallen under the HMO scheme, with an estimated 177,000 additional landlords now requiring a licence. A growing number of local authorities are also introducing licensing for landlords in their areas.

On a broader scale, the Bank of England raised the base rate in November 2017, then again in August 2018, to hit 0.75% – the highest since February 2009.

The upheaval isn’t over yet. A proposed lettings fees ban, which is currently going through parliament, may result in costs being pushed to landlords. And ongoing uncertainty over Brexit negotiations has left a cloud over the economy and property market.

Buy-to-let rates hit record low

It may seem to be all doom and gloom for landlords, but there’s good news too: slow activity has pushed lenders to offer the lowest rates on record.

Data from Moneyfacts shows the average rate for five-year buy-to-let mortgage deals has hit 3.4%, the lowest since Moneyfacts began reporting.

With two base rate hikes in the last year and rumours of more ahead, a five-year mortgage could be an appealing prospect for many landlords, especially at such attractive rates.

These deals tend to come with early repayment charges if you need to sell up during the five-year period. Often, these decrease over time – so for example, you might pay 5% in the first year of your deal and 1% in the last.

If you’re likely to want to sell up, or are nervous about the market in the area you’re buying, it’s worth considering how these fees would eat into your profits.

Should I invest in the current market?

National and regional statistics can shed light on broad trends – but you shouldn’t use them to make decisions about whether or not to buy a specific property.

In fact, the less activity in the buy-to-let sector, the less competition you’ll face from other prospective landlords. And as a property investor, your purchase is usually chain-free, giving you an edge over homebuyers.

If you decide buy in the current market, these are the factors you should consider:

Local property market conditions

Before you buy an investment, it’s worth doing your research. Work out what similar properties in the area are selling for, and how much rent is being charged. Look for yield figures, too, which will show you how much rent is usually received as a percentage of the property value.

You can compare listings on the market, and ask for valuations from local estate and lettings agents.

It’s also worth researching the local economy, including whether there are jobs in the area, how much demand there is for housing and whether any factors might push up (or drag down) the value of your home.

Consider the demographics of the local area to work out what types of property are likely to be in demand – a three-bedroom home may be difficult to let out in an area that’s mainly child-free couples, for example.

The property and its condition

Once you’ve found a property, check what condition it is in. If you have an offer accepted, commission a house survey so you can be sure it has no structural issues.

If you need to renovate before a tenant moves in, work out how much you’ll need to do and the approximate cost. Avoid over-spending – the property doesn’t need to be your dream home, just suit a tenant’s needs.

How much you can afford to borrow

Lenders subject buy-to-let investors to strict liability tests. As a general rule, your rental income will need to cover at least 125% of the mortgage payments. If you own a number of homes, this will usually be calculated on a property-by-property basis, not on your portfolio as a whole.

You’ll also generally be expected to have a deposit of at least 25%.

Keep in mind that buy-to-let mortgages are often interest-only, meaning you’ll only be paying back interest on the loan each month, not the loan itself – so you’ll need to have a plan for how you’ll pay it back at the end of the term.

And don’t forget to account for void periods, when your property doesn’t have tenant. You need to make sure your other income will stretch to cover mortgage repayments between tenancies.

Your tax liabilities and running costs

Aside from mortgage payments, buy-to-let properties have ongoing running costs, including maintenance and repairs, safety certificates and, if you use a lettings agent, management costs.

You’ll also need to pay tax on your rental income at the same rate as your employment income, though you can deduct your expenses.

Seek professional advice

Finding the best mortgage deal as a landlord can be tricky. Expert advice from a mortgage broker can help you find the right offer for your circumstances.

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