The Bank of England has been watching the buy-to-let market for some time and is concerned about the amount of money pumped into the market and its vulnerability to even a small rise in borrowing costs.
The booming buy-to-let mortgage market, which accounts for 15% of outstanding mortgages and 18% of new mortgage lending, poses a threat to the stability of the UK economy. In particular it pointed to the lending standards around buy-to-let and the ease at which mortgages are handed out to landlords, particularly in light of an impending interest rate rise. It said a rate rise could mean landlords rushed to sell their properties and lead to a burst in the house price bubble.
Whether you’re a newbie to buy-to-let, or a seasoned investor, one of the most important things when it comes to managing your property (or portfolio of properties) is to understand how buy-to-let mortgages work.
POINTS TO CONSIDER WHEN PURCHASING YOUR FIRST OR ANOTHER BUY-2-LET:
It’s all about income…
Buy-to-let (BTL) properties can make you money in two ways:
- Capital growth – the value of your property increasing over time and
- Rental income – monthly profits from your rental income
However, as much as you can make money, you can also lose it if:
- Property prices go down – you lose money on the value of the flat or house
- You have trouble finding tenants to fill the property, or getting the level of rent you need to break even.
Even so, at present, with the property market improving and house prices rising, it may be the time to think about becoming a buy-to-let investor.
For experienced buy-to-let landlords, George Osborne’s Summer Budget probably came as a bit of a shock as there are new legislations that you need to consider:
FOR EXPERIENCED AND INVESTORS
New restrictions on buy-to-let mortgage tax relief were announced, changing the game for buy-to-let investors and making it much harder for some to make a profit.
Your Money Solutions sum up here what the changes mean and whether this affects your ability to make an acceptable return on buy-to-let.
Don’t worry if…
- You rent out properties you own outright, or
- You’re selling up in the next year or two.
Read on if…
- You’re looking to purchase your first or another buy-to-let property
- You have a buy-to-let mortgage
- And you’re planning to stay invested beyond 2017.
Firstly, the amount of tax relief you can claim on mortgage interest will be capped at basic rate (currently 20%). This obviously affects all higher and additional rate taxpayers, but that’s not the only group that will be affected.
Secondly, if you’re completing a buy-to-let purchase or purchasing a buy-to-let property on or post 01/04/2016, you’ll have to pay an additional 3% in Stamp Duty Land Tax (SDLT) on top of the standard stamp duty land tax
Thirdly – and this part has often been glossed over – the way you calculate your income for tax purposes is changing. You will no longer be able to deduct mortgage interest from rental income before you declare your taxable profit.
Tax experts are only just getting to grips with the full effects of the change. The Government says it expects nearly 1 in 5 individual landlords to pay more tax as a result. We suspect it might affect a few more than that.
Should you worry about your buy-to-let yield in the coming years? If so, what can you do to soften the blow?
Just make sure you understand the investment risks associated with a buy-to-let property, and seek the advice of Your Money Solutions.