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.

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.

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.