Is now the right time to invest in property?

Is now the right time to invest in property?

Is now the right time to invest in property?


We take you through the issues you should consider before giving the green light.

Investing in property has long been a popular alternative to putting money into shares or topping up your pension fund.

One of the big draws of property investment is its tangible nature. Many buy-to-let investors are homeowners themselves, and they often feel they understand property better than many other investments.

And, unlike putting money into a pension fund, you do not have to wait until you are a certain age before you can access your money.

But the attractions do not end there. A buy-to-let investment offers the possibility of making both capital gains, as house prices increase, and receiving a regular income, through rent.

Many buy-to-let investments are also geared, meaning you have borrowed some of the money that supports the investment. While having a geared investment increases the risk involved if property prices fall, it also potentially increases the gains you will make if they rise.

If you’re tempted to become a buy-to-let investor, or expand your existing portfolio, here’s what to factor in.

What’s the forecast for house prices?

A key factor to consider when thinking about snapping up buy-to-let property is how house prices are likely to perform.

Unfortunately, the impact the coronavirus pandemic is likely to have on the economy makes it particularly difficult to predict what will happen to property values this year.

With the Bank of England warning the UK could be facing its worst recession for more than 300 years and unemployment expected to rise, many economists are forecasting a dip in house prices

This could, however, create a good buying opportunity. If you are interested in investing, you will need to look at the pros and cons of going ahead with a purchase now, or waiting in the hope of getting a discount later.

What’s happening to interest rates?

The Bank of England base rate, which influences the rates that banks charge to borrow money, is currently at a record low of 0.1%.

In addition, buy-to-let mortgage rates are also highly competitive with best-buy two-year fixed rate deals starting at just 1.35%. 

The low cost of borrowing means the fixed costs of being a landlord are also likely to correspond lower, with the cost of servicing an interest-only mortgage of £150,000 at the above rate coming in at just under £170 per month.

Existing landlords may also want to consider taking advantage of the current low level of interest rates to remortgage properties to unlock capital and expand their portfolio.

The low cost of borrowing also helps to offset some of the higher stamp duty charges landlords face as a result of the introduction of the 3% surcharge for people buying an investment property or second home.

Coronavirus: Get the latest property news and information

What demand is there for rental homes?

Demand for rental homes is booming as high house prices delay the age at which people purchase their first property.

An estimated 4.5 million households rent in the private sector, with the figure soaring by more than 60% during the past decade, according to the Office for National Statistics (ONS).

This trend is expected to continue as the current economic uncertainty creates concerns about job security, causing people to delay buying property.

Meanwhile, the number of homes for rent is falling as landlords sell up or stop expanding their portfolios after a raft of tax changes made the sector less profitable.

These high levels of demand, combined with a shortage of supply, pushed rents in England up to a record high of £700 a month before the UK went into lockdown, according to the ONS.

Look out for our quarterly Rental Market Report, which highlights the UK cities where rents continue to increase. 

What is legislation in the sector like?

While there are many advantages to investing in a buy-to-let property, it is important to do your sums before you take the plunge.

There have been several tax changes in recent years. These include a phasing out of mortgage interest tax relief, with this instead replaced with a 20% tax credit, an end to the ‘wear & tear’ allowance and the introduction of a 3% stamp duty surcharge on property purchases by landlords.

Regulations on the standards rental properties must meet have also been tightened, and letting agents can no longer charge fees to tenants, a cost that is generally passed on to landlords instead.

You will also have to pay capital gains tax at a rate of 28% on any increases in your property’s value - minus your personal allowance, which is £12,300 in the 2020/21 tax year - when you come to sell it.

Remember too, that you are likely to have void periods when your property is not let, while there will also be maintenance costs and letting agents’ fees to pay if someone manages your property on your behalf.

Is property a stable investment?

Property is generally considered to be a more stable investment than equities, also known as shares.

As the recent impact of coronavirus has shown, the stock market is prone to significant volatility.

It is unheard of for house prices to lose 25% of their value in three months. But this is exactly what happened to the FTSE 100 during the first three months of the year.

But while house prices move up and down, the property market does tend to bounce back.

For example, although house prices fell by nearly 20% in the 18 months following the financial crisis, they regained this level within five years.

And that’s because the UK suffers from a significant mismatch between demand for property, due to a rising population, and the supply of homes as a result of low building levels.

It is estimated that the UK needs to build up to 340,000 new properties each year just to keep pace with demand.

Average UK property values are now 154% higher than they were 20 years ago, according to Zoopla data

Keep an eye on Zoopla's latest House Price Indexwhere you can track which areas are seeing the biggest increase in house price growth. 

Is property investment rewarding?

Many people find investing in property very enjoyable. This can be particularly true if you like doing DIY and carrying out improvements to the properties you own in order to increase their value. Other investors enjoy searching out potential up-and-coming areas.

Even if home improvements and spotting locations with potential is not for you, it can still be satisfying to know you are a good landlord providing accommodation of a high standard for your tenants.

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