Buy to Let

The death of dinner party buy-to-let and easy gains

For much of the past two decades if you gave many people a large lump sum there would be one chief place they would consider investing it – property.

Buy-to-let – or contemplating it – was Britain’s favourite investing hobby. The lure was strong of buying that house round the corner, a student home for the kids, or holding onto a previous property if a couple moved up the housing ladder.

And we loved to talk about it.

Yet today, dinner party chatter is as likely to be about why the numbers didn’t stack up for keeping your old flat, or buying another property as your pension.

It’s not that we’ve fallen out of love with bricks and mortar – or lost our national conviction that prices can only go up, despite their periodic big falls – but the Government and financial authorities have snatched the wind from our sails.

This has come in the shape of the stamp duty hike that added an extra 3 per cent to buy-to-lets and second homes, the income tax changes that remove full mortgage interest tax relief against rent, and regulatory changes that make it tougher to dish out mortgages.

All this has made it considerably harder to do buy-to-let, particularly if you are relying on borrowed money.

In that sense, the stated aim of curbing enthusiasm has worked, albeit alongside that came an unstated aim of raking in a load more tax.

The argument for the buy-to-let crackdown is that we have a limited number of homes to go round in the UK and people who are struggling to buy one to live in, so making it a bit harder for those who already have a property to get another for pure profit is fair enough.

Whether you agree or not with the method – and I must admit that I struggle with the concept of even higher stamp duty and a tax on revenue not profits – these changes have contributed to a year when first-time buyer numbers are up and buy-to-let purchases are down.

The death of buy-to-let has been greatly exaggerated, however. It still remains attractive enough for investors to keep buying, even if the great British property dream is now skewed further towards the wealthy who can buy in cash.

But the changes have perhaps killed off the old world of dinner party buy-to-let. The days when there was easy money to be made and talked about.

Twenty years ago homes were cheap when compared to the long-run average against wages, today they are expensive

Twenty years ago homes were cheap when compared to the long-run average against wages, today they are expensive

Twenty years ago homes were cheap when compared to the long-run average against wages, today they are expensive

Much of the bumper profits we hear about from buy-to-let were made from borrowed money, with leverage magnifying gains against sums invested and a kicker from a system that offered full mortgage interest tax relief but was not so generous to homeowners.

Of course, in many cases the numbers on buying a property and letting out can still make sense. If you can find a property at a decent price that rents for a reasonable amount, then you can meet the higher rental cover and potentially bigger deposit demanded by the lender at the behest of the financial watchdog.

But those properties are in far shorter supply than they once were and most live outside the boom lands of London and the South East. It is also undeniably harder to finance that buy-to-let for the majority of people, as a selection of hurdles have been raised for them, from stamp duty to mortgage rules.

Once they have the buy-to-let up-and-running they will then face a tax bill on their rental income that is now calculated on revenue rather than profit. 

This was one of the most important changes in the reining in of full mortgage interest tax relief: rental income is now added to your other income and you pay the marginal tax rate on that and then get a tax credit back, which by 2020 will be a maximum of 20 per cent on your mortgage interest costs.

Until this system was introduced, landlords simply deducted mortgage interest and other allowable expenses from rental income and then tax was calculated on the sum left – ie purely on their profit.

This new system means that while on the surface it is only higher rate taxpayers who will take a hit from cutting mortgage interest relief down to a maximum of 20 per cent, those paying basic rate tax may also be stung by being moved up a tax bracket.

Now that the principle of cutting this relief has been introduced , you also have to ask yourself whether that 20 per cent tax credit will remain. Budget-strapped future chancellors will surely be eyeing that one up and could you see a Corbyn-led or other Labour Government keeping a landlord’s tax break.

The buy-to-let hobby isn’t dead. People will, of course, still need homes to rent and it is private landlords who will provide much of them and in a world of low interest rates and fear of the stock market, property investing will retain its attraction.

But it is now much harder to make the numbers add up and turn a healthy profit, while committing to the hassle. 

Buy-to-let investors must be much more careful nowadays. Twenty years ago homes were cheap, now they are expensive. The only thing keep prices afloat against wages is low interest rates – and they must one day go up.

For long-term success, today’s buy-to-let investor needs to know their numbers, know their area, know their prospective tenant and then be willing to look after them.

What they shouldn’t do is just rely on house prices going up.

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