Many people dream of the day they can buy a property, rent it out, and then sit back and watch the cash roll in right? It sounds lovely, but in reality there is a lot more to buy to let properties, and as mortgage brokers we want you to be armed with the correct knowledge before making any decisions.
With the 3% stamp duty surcharges, a seemingly endless range of new legislation and regulations and high tax rates to contend with, it’s important to fully understand what to expect when either applying for a BTL property, or continuing with your current BTL mortgage deal.
To begin with, Bank of England figures estimated that by the end of the year monthly repayments for buy-to-let landlords could rise by £175, and a fifth of landlords monthly repayments could increase by over £300. Naturally, this increase means owning a buy to let property may no longer be financially viable for many landlords as the rent received isn’t sufficient to pass the higher stress test, meaning landlords are faced with either sitting on high SVR, selling or reducing the mortgage (which not everyone is able to do).
The tax advantage of renting also no longer exists in the same way it did before resulting in Buy-to-let mortgages no longer being tax-deductible, so many landlords face significant losses in the next few years.
As a result of this, Buy-to-let has become increasingly unprofitable for landlords with mortgages and many have decided to exit the sector, while those who currently remain are pondering the best way to adapt to the new market conditions.
On top of all this, the regulatory environment is getting tougher too. The Renters’ Reform Bill, which features a package of reforms to protect renters, is expected to be debated and voted on in Parliament very soon. And by 2026 all newly rented properties should be required to have an Energy Performance Certificate (EPC) rating of C or above, if this is achievable, you will need to spend £10,000 on an exemption. A few positives to this is the possible off set against tax, as well as the fact that tenants will have lower energy bills and therefore more money to pay rent, resulting in less defaults.
As we always say here at Bright Money Independent, “it’s not all doom and gloom” and there are some positives to BTL in 2023. If you’re a cash-rich landlord you may well be at an advantage as rental yields are increasing as rents rise so there will undoubtedly be some good properties to buy from “distressed sales.”
Also, due to higher interest rates, steeper affordability calculations and fewer 95% loan-to-value mortgages, many first-time buyers will delay buying a property this year and continue to save. But of course they still need somewhere to live. Therefore, rental demand is set grow throughout 2023, with rent continuing to rise at an extraordinary rate and, while they’re likely to slow this year, they won’t decrease.
Still unsure on what to do? (We get it, it’s overwhelming) but one solution could be to consider incorporating your BTL (buying the property under a ltd company name). If you’re in the higher tax bracket, you could be paying 40% tax on your income if your property is set up in your personal name, whereas if you set up a limited company, you’ll pay the lower corporation tax – which currently sits at 19%. However, this is likely to rise to 25% this year, which will affect your profits again.
And finally, some lenders are reducing stress tests now that rates are coming down will have products with lower interest rates & higher arrangement fees.
Although some of the recent changes make buy-to-let less attractive to some investors, if done right, it still remains profitable. Whilst rental yields have declined, it’s important to remember that although rental income is important, capital growth is also a factor that makes investing in property very lucrative.