Is there a future for buy-to-let?
Napoleon labelled the British ‘a nation of shopkeepers’, but two centuries later it seems we’ve become a nation of landlords. Today, there are an estimated 2.65 million private landlords in the UK, according to HMRC figures from last July. Collectively, those landlords own more than £1 trillion in property assets.
Now, though, is not the easiest time for them. With the Bank of England raising the base interest rate to 3.5% to rein in 40-year high inflation – and more rises likely – mortgage rates have climbed.
But on the positive side, yields are still healthy, with rental prices rising rapidly. According to Zoopla’s Q3 2022 Rental Market Report*, UK rental growth is close to peaking at 12.3% a year, while in London it’s 17.8%.
Meanwhile, there’s a shortage of rental properties across the country, making demand high. And rising interest rates mean a growing category of renters is emerging, says Katherine O’Shea, Director, Real Estate Investment Service, Coutts. “There’s much more demand from young professionals who are ‘would-be buyers’ but have to rent because the hike in interest rates has impacted affordability,” she says.
* Link takes you to a third party website which is not maintained by Coutts. We are therefore not responsible for the accuracy of the information contained therein.
What every buy-to-let landlord should know
If you’re thinking of acquiring a buy-to-let investment, there are some important points to consider:
- Mortgages – most buy-to-let lenders require a deposit of at least 20%. You’ll need to show that your projected monthly rent covers your mortgage repayments by 125%.
- Additional costs – on top of mortgage payments, you’ll need to factor in letting and management fees, maintenance costs, void periods and insurance.
- Tax – there’s a lot to consider here, and it could be worth consulting an accountant. Private landlords are subject to tax on rental income, but can claim a tax deduction of up to 20% of their mortgage interest payments. They could potentially get tax relief on some maintenance costs too. Capital gains tax is also applicable on buy-to-let properties. And if the landlord is a limited company, they pay corporation tax rather than income tax. Stamp duty is another liability – an upfront cost – and buy-to-lets generally incur a 3% surcharge.
- Regulation – private rented property now has to conform to the government’s Minimum Level of Energy Efficiency Standard. By 2025, all newly rented properties must reach an EPC rating of C or above. This will apply to all rental properties by 2028.
- Rent freezes – To help tenants struggling with the cost of living crisis, the Scottish Government has passed an emergency bill placing a temporary cap on rent increases, and a temporary ban on evictions. No changes have been announced for England, Wales, or Northern Ireland.
- Renters Reform Bill – this proposes sweeping changes to tenants’ rights and landlords’ obligations. Legislation is not yet in place but could have a major impact on the buy-to-let market.
How Coutts could help you make the most of buy-to-let
Katherine says clients invest in buy-to-let for a range of reasons.
“For many investors, there’s a desire to put funds into assets they can enjoy and add value to; for others it’s simply about financial asset allocation,” she says. “But for lots of our clients it’s about multi-generational financial planning and investing in assets they can pass on to their children.”
If you’re considering it, our bespoke buy-to-let mortgage services could help you find the mortgage to match your needs, from mortgages for multiple properties to special purpose vehicle buy-to-let arrangements that allow you to borrow under a UK company structure. Our Real Estate Investment Service could also help clients looking for residential property on sale for over £2m. Contact your private banker to learn more.
Your home or property may be repossessed if you do need keep up the repayments on your mortgage. Over 18s only. Credit is subject to status and approval. Think carefully before securing debts against your home.
You may not be eligible for all Coutts mortgage solutions. Security may be required. Product fees may apply.
Tax reliefs referred to are those applying under current legislation which may change. The availability and value of any tax reliefs will depend on your individual circumstances.