Did you know that the buy-to-let market launched almost the same time as the Spice Girls, around 28 years ago? Many people are surprised when they learn that prior to 1996, there was no such market like we see today.
Before the emergence of buy-to-let mortgages, renting was mainly a social activity with a minor presence of professional landlords who typically bought properties outright, without specialized mortgage products. That all changed with the introduction of the buy-to-let mortgage in 1996, which quickly caught the attention of numerous investors.
For years, investing in rental properties seemed like a straightforward path to wealth, greatly aided by the sustained rise in house prices. Unfortunately, the landscape has become more challenging for property investors over the last seven to eight years.
Landlords are now dealing with a tax system that’s less favourable than in the past. Since 2016, they’ve been burdened with higher stamp duty when expanding their portfolios, and as of 2020, they’re taxed on rental income rather than profits if they buy properties in their own names.
Efforts from both central and local governments have been directed towards making the buy-to-let model less appealing, with the aim of making more properties available to first-time homebuyers. On top of all this, the recent spike in interest rates has introduced additional financial strain on property investors.
Despite these hurdles, there is still optimism for the buy-to-let sector. For instance, mortgage rates are starting to stabilize, with a significant drop observed between August last year and February this year. This gives landlords a better chance at maintaining profitability, and there’s potential for even lower rates if the Bank of England hints at interest rate cuts. However, borrowing costs are still higher than they were before the rate hikes began in 2022.
To stay ahead, landlords should focus on strategic planning, making smart investments, and maintaining tax efficiency. Here are three strategies to consider:
1. Buying properties through a limited company can offer tax advantages. Unlike personal ownership which now limits mortgage interest deductibility, a company can fully deduct these costs before tax. This could be especially beneficial for higher-rate taxpayers, as corporation tax is lower than the higher income tax rates. However, remember this approach won’t suit basic rate taxpayers and comes with more paperwork and a limited choice of mortgage products. Always seek professional tax advice before making this move.
2. If you can afford a larger deposit, you’ll likely secure a lower mortgage rate. Lenders see less risk in borrowers with greater equity, which can translate into significant monthly savings. Although not everyone will have the funds to increase their deposit, it’s a valuable option to consider when purchasing or re-mortgaging.
3. Consider diversifying into houses of multiple occupation (HMOs) for better yields. Catering to tenants such as young professionals in cities, HMOs offer the potential for higher rental income as you’re renting to multiple separate tenants. While they’re in high demand and can be more profitable, they also come with their own set of regulations and management considerations.
