Lettings market may no longer add up

Too many new homes and rising rates threaten the buy-to-let investor, says James Daley

House prices have finally started to come off the boil over the last few months. According to figures from Hometrack (who compile information about the housing market) released this week, average residential property prices fell for the first time in more than two years in October. Even the more bullish property-price surveys have been reporting a marked slowdown in growth since the end of the summer.

For the average homeowner, this need not be too much of a concern. With interest rates, inflation and unemployment all still at relatively low levels, the chances of the UK sustaining a major housing crash any time soon are still remote – so it is probably best to sit tight and wait for the storm to pass.

However, for those who have been, or are thinking of, dabbling in the buy-to-let sector – buying up residential property for investment purposes – the economics are rapidly becoming less attractive.

In its financial stability report, published at the end of last week, the Bank of England warned that buy-to-let investors are now starting to look rather vulnerable, pointing to the fact that residential rents have been weak over the last few months, while borrowing costs have been on the rise.

According to Paragon, the specialist buy-to-let lender, the average rental yield (the annual rent as a percentage of the property's value) across the UK is now at around 6 per cent. However, in many areas of the country, especially the south-east and London, yields are much lower – often well below 5 per cent, according to some analysts.

With the Bank of England base rate now at 5.75 per cent, and mortgage rates generally higher still, borrowing costs and expenses are now often much greater than the rent that landlords are receiving.

Although it's still possible to get buy-to-let mortgages with interest rates of just over 5 per cent – such as Chelsea Building Society's two-year tracker at 5.24 per cent – the chances are that you'll also be hit with a hefty fee. In the case of the Chelsea deal, the fee is an eye-watering 2.5 per cent of the property value, which could come to more than £10,000. Adding high arrangement fees onto your mortgage may have made sense when house prices were rising at more than 10 per cent a year, but with stalling property prices and low rental yields, the economics are very different.

Analysts at Credit Suisse said last month: "In the absence of significant house price inflation, the maths does not work."

The Bank of England highlighted the particular problem of newly built properties, where prices have typically been even softer than the rest of the market over the past few months.

David Hollingworth, of London & Country mortgages, the fee-free broker, explains that, when a large number of buy-to-let landlords buy flats in the same newly built block, it tends to have a detrimental effect both on rents and prices. As a result, lenders have become increasingly reluctant to grant mortgages on these types of properties.

"Several lenders have started pulling away from new-build," says Hollingworth. "A lot of the talk of the buy-to-let timebomb at the moment has been due to the oversupply of new flats." GMAC, for example, will no longer lend buy-to-let landlords any more than 75 per cent of a property's value if it is newly-built. Alliance & Leicester has capped its buy-to-let mortgages on new builds at just 70 per cent. Portman Building Society stopped lending on newly built properties altogether several months ago.

Hollingworth points out, however, that plenty of established buy-to-let investors, who bought into the market many years ago, will still be quids in. "There are a lot of landlords out there who have pretty stable tenants in place, and who got into buy-to-let a long time ago," he says. "They've got plenty of equity in their properties, their mortgages are fairly modest and are easily covered by the rent."

However, Ray Boulger of Charcol, mortgage broker, argues that for amateur landlords – who only own one or two properties, and who are sitting on slightly larger mortgages – there may be a case for taking profits, especially if you're not committed to the sector for the long-term.

He adds that if you are thinking of selling a property, it's important to examine the tax implications. Last month, the Chancellor announced that he was planning to abolish taper relief (which reduces tax the longer you hold an investment) on Capital Gains Tax (CGT) next year, while reducing the headline rate from 40 to 18 per cent.

Currently, if you've owned a property for more than 10 years by the time you sell it, you will be entitled to full taper relief – reducing the effective tax rate on your capital gain to 24 per cent. And if you've owned it for much more than 10 years, you should also be entitled to indexation relief, which will reduce your tax liability even further.

From next April, however, all gains will be charged at 18 per cent, regardless of how long you have owned them. So if you've held the property a long time, it may make sense to sell out before the changes to take advantage of the taper and indexation relief you are entitled to. If you've only owned your property for a few years, you will be better off waiting until the change in the CGT rules.

It's also not yet clear whether lettings relief will be retained. This exempts you from tax on £40,000 of any gain if the property that you are selling was ever your principal residence. If the Government suggests that it is to scrap lettings relief, many landlords are likely to want to sell up before it is abolished.

If you're thinking of getting into buy-to-let for the first time at the moment, Boulger advises that you tread carefully. "Do your homework, get to know your market, check where there's good rental demand, and then watch the market," he says. "There are inevitably going to be some distressed sales over the next year – perhaps as people who have had their properties on the market for a while are forced to mark them down because they need to move. So looking out for these sort of bargains is the way to go."

The likes of Paragon claim that rents are now starting to rise, as fewer first-timers can afford to buy, and the immigrant population continues to expand. If this is the case, yields will eventually become attractive enough to attract new landlords back into the market, and then prices will follow. The next year or so, however, looks like it will offer slim pickings for the buy-to-let landlord.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
Andy Davidhazy at the beginning (left) and end (right) of his hike
video
News
Taylor Swift is applying to trademark song lyrics from 1989
people
Voices
The popularity of TV shows such as The Liver Birds encouraged Liverpudlians to exaggerate their Scouse accent
voicesWe exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
Life and Style
Parker says: 'I once had a taster use the phrase 'smells like the sex glands of a lemming'. Who in the world can relate to that?'
food + drinkRobert Parker's 100-point scale is a benchmark of achievement for wine-makers everywhere
News
i100
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Retirement Coordinator - Financial Services

    Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

    Recruitment Genius: Annuities / Pensions Administrator

    Negotiable: Recruitment Genius: You will be the first point of contact for all...

    Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

    £18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

    Ashdown Group: Learning and Development Programme Manager

    £35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
    Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

    Spells like teen spirit

    A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
    Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

    If fashion is a cycle, this young man knows just how to ride it

    British designer Jonathan Anderson is putting his stamp on venerable house Loewe
    Number plates scheme could provide a licence to offend in the land of the free

    Licence to offend in the land of the free

    Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
    From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

    From farm to fork in Cornwall

    One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
    Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

    Robert Parker interview

    The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
    Don't believe the stereotype - or should you?

    Don't believe the stereotype - or should you?

    We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
    How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

    How to make your own Easter egg

    Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
    Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

    Bill Granger's twist on Easter Sunday lunch

    Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
    Joe Marler: 'It's the way I think the game should be played'

    Joe Marler: 'It's the way I think the game should be played'

    The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
    Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

    Cricket World Cup 2015

    Has the success of the tournament spelt the end for Test matches?
    The Last Word: Justin Gatlin knows the price of everything, the value of nothing

    Michael Calvin's Last Word

    Justin Gatlin knows the price of everything, the value of nothing