Tougher mortgage rules, disappearing tax breaks and extra stamp duty are among the growing number of cons around buy-to-let. But do the pros still outweigh them? Find out here.
PRO: Property is a long-term winner...
House prices fluctuate and are regionally varied. But history has shown that the long-term trend is up. According to Zoopla data, property values are nearly 20% higher than 10 years ago and a staggering 263% higher than 20 years ago.
CON: ...but right now, buy-to-let is getting tougher
As things stand right now however, mortgage lenders, HMRC and the Government are all turning the screws on landlords' borrowing and profit potential.
New rules set down by the Bank of England's Prudential Regulation Authority (PRA) mean than from October 2017, lenders will have to look at a landlord’s entire property portfolio when deciding whether to give buy-to-let mortgage applicants the green light.
All existing landlords with four or more properties that are already mortgaged will be required to submit financial details on every property, such as rental income and outstanding borrowing, before being considered for a new mortgage or refinance on an existing home.
The PRA had already tightened lending rules at the back end of last year, when it directed lenders to raise so-called rental coverage requirements to between 140% and 145%.
Rental coverage is the percentage of rental income lenders want to see versus the cost of monthly mortgage interest. This used to stand at around 125%, so if mortgage interest amouted to £1,000 a month, landlords would need to demonstrate rental income of £1,250.
Now minimum rental coverage has been raised to as much as 145%, landlords will need to show rent of £1,450 for the same £1,000 mortgage interest payment.
Interest rates on which these calculations are based (known as stress testing) have also been raised. For example, whereas lenders may have stress tested at a rate of 5%, they now might use 5.5%.
"It means the sums are generally harder to stack up," says David Hollingworth from London & Country mortgage brokers.
Would tougher rules put you off buying-to-let?— Zoopla (@Zoopla) September 7, 2017
Tax reliefs for landlords are also fast-disappearing. From April 2017, the relief available on mortgage interest started to be capped at the basic rate of 20%. Previously, reliefs of 40% or even 45% were available for higher earners. By April 2020 all landlords will be affected.
The standard 10% tax relief on ‘wear and tear’ costs for landlords letting furnished homes was already scrapped in April 2016.
A couple of other developments have added salt to the wound. In June for example, Insurance Premium Tax (IPT) rates were hiked from 10% to 12%. IPT is payable on all general insurance policies which includes buildings insurance for which landlords are responsible.
And lettings agency fees to tenants could be banned from as early as 2018. So, landlords will need to find other means of funding costs such as credit reference checks and inventories.
Also from April 2018, landlords starting new tenancies will have to prove their property has a minimum energy-efficiency rating of E on an Energy Performance Certificate. The law will apply to existing tenancies from April 2020.
PRO: Property prices are coming off the boil...
The days of making a 'quick buck' on property look to be over, having either fallen or only edged upwards in the last six months, according to figures from Nationwide. And more than a third (34%) of all property listed for sale on Zoopla has been reduced in price.
CON: ...but the housing market is uncertain
A healthy housing market requires economic and political stability, something which an impending Brexit and rising interest rates, could put under threat.
PRO: Affordable locations are tipped for growth...
There may still be opportunities to profit from property, although increasingly they are to be found outside of London.
Hometrack's latest Cities House Price Index for example, revealed that Edinburgh is now the number one city in terms of house price growth, reporting rises of 6.7% over the past 12 months. It was followed by regional cities Manchester and Birmingham.
Average house prices in the cities now stand at a respective £219,000, £156,800 and £153,200, according to Zoopla.
CON: ...but you'll pay extra stamp duty
Since April 2016, if you’re buying an additional property that is not replacing your main residence – a buy-to-let or holiday home for example – you'll face a 3% loading on your stamp duty bill.
Unlike regular stamp duty, the extra 3% is charged as a flat rate on the entire cost of the property. This would amount to an extra £9,000 on a £300,000 home, for example, bringing the total stamp duty payable to £14,000.
Find out all you need to know about 3% stamp duty rules and leave a question at our dedicated Q&A.
PRO: The rental market is strong...
There’s unlikely to be a shortage of people looking for decent private rented property in the medium to long term as, unfortunately, Generation Rent – those who will never be able to afford to buy – is growing.
Just 40% of 20-to-39-year-olds living in the capital will own their home by 2025, according to figures from PwC. This compares to 60% in the year 2000.
And according to Hometrack, the average tenancies are getting longer – from 3.5 years in 2014, to 4.3 years today.
CON: ...but rents are largely stagnant
Average rents charged by UK landlords were just 0.9% higher than 12 months ago, according to Homelet. And this is was the first increase recorded for three months. Average monthly rents now stand at £909.