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A home for your money
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Article
Is buy-to-let still worth your time and money? Paula John finds out
Investing in the residential property market has paid dividends this century. With property prices booming, many landlords have seen the value of their assets increase while private tenants pay off their mortgages. |
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The low cost of borrowing has added to the appeal of the sector, particularly with increasing numbers of lenders piling into the market and offering competitively-priced buy-to-let mortgages. As a result, the total size of the buy-to-let sector was worth £63.5bn by the end of June this year, made up of 632,000 mortgages and accounting for seven per cent of all outstanding residential homeloans, according to the Council of Mortgage Lenders (CML). This is almost a 10-fold increase since 2000.
Yet buy-to-let business activity has slowed down in the last 12 months. Figures from the CML indicate that the number of new buy-to-let loans taken up fell by 18 per cent in the second half of 2004, and declined by another four per cent in the first half of this year (see graph 1, p.33). So why should this be? |
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"The slowdown was inevitable, simply because the amount of buy-to-let business being written prior to that was unsustainable," says Matt Grayson, spokesperson for Halifax's specialist lending arm, BM Solutions. "This is still a very healthy market, however, and potential investors should not be put off by misleading headlines. In fact, as long as the investor has done their homework, there couldn't be a better time to buy-to-let."
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Simon Tyler, managing director of specialist broker Chase De Vere Mortgage Management, agrees: "This market has proved surprisingly resilient. Even though buyers are becoming more discerning, volumes have remained very high. Record house prices and changing demographics have kept demand for rented properties very strong and that, combined with innovative lending, has enabled more and more new investors to enter the market, and maturer investors to expand their portfolios quite rapidly."
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Our wish is your demand
Of course, house prices are cooling and rates are subject to change, but it is demand that underpins the rental market in the UK. Right now that demand looks strong and certainly seems sustainable.
"Just look at the fundamentals," says John Heron, managing director of buy-to-let specialist lender Paragon. "Inward immigration, rising student numbers and job mobility are key factors. Many young people are unable to buy until later in life because of student debt and a high entry threshold to the housing ladder. As a result the average first-time buyer is now 34, so they are renting for longer than ever before." |
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There is no indication that any of these underlying factors are likely to change, and demand for private rental accommodation may well increase. Looking at student data, for example, the average student debt has increased 500 per cent over the last 10 years, to around £13,000 on graduation. According to the CML that figure is set to grow to £33,708 by 2010. That in itself is likely to increase the pool of longer-term renters in the medium term.
And research from specialist lender GMAC-RFC claims that, finances aside, increasing numbers of people in their twenties are simply choosing property purchase for social reasons. Seventy per cent of those it surveyed said renting allowed them to choose an area near friends, while six tenants in 10 said renting allowed them to live in a better area than they could afford to buy in.
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Close competition
As for the funding for rental property, many buy-to-let mortgages are looking seriously attractive at the moment. In the past, mortgages for investment purposes were charged at commercial rates that were a lot higher than mainstream homeloans. |
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However, the situation has changed completely over the past five years or so, as more players have come into the market. "We have lenders now that are pricing buy-to-let mortgages at more competitive levels than many residential loans," observes Chase De Vere's Tyler. "We recently saw the launch of the cheapest ever five-year fixed buy-to-let loan at 4.69 per cent*, for example -- and that's cheaper than many standard five-year deals. Products like that will keep investor momentum going." |
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Tyler also points out that the buy-to-let sector could well be in for a boost as of next April, when changes to pensions legislation will be introduced which allow some investors to hold residential property within Self-Invested Personal Pensions.
"A recent survey by a national financial adviser found that 37 per cent of its existing SIPPs clients planned to buy residential property with their pensions. If this percentage is extrapolated from the 140,000 people who own a SIPP, there could be more than 50,000 people willing to take advantage of the new rules," he says.
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Plan of action
So if you are a potential buy-to-let investor what course of action should you be considering? With property price increases cooling down considerably, has the buy-to-let boat left the quay? |
"Buy-to-let is by no means a 'get-rich-quick' scheme and new investors should be aware of this," warns Grayson. "Our research has shown that buy-to-let borrowers, on average, plan to stay in the market for more than 10 years and typical deposits in the buy-to-let market are as much as 25 per cent, so investors should be confident they have the time and money to enter the market." |
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Whether you're planning on owning just one property or building a portfolio, you need to look at what products will suit your needs. "Flexible mortgages can make sense, as they give you the freedom to overpay, underpay and take payment holidays, for example," suggests Grayson.
"And you should check that the deal you go for is portable, allowing you to change your mortgage to another property while retaining the most suitable rate, for example."
Shopping around has never been more important. With the number of deals on offer increasing all the time, both first-time investors and existing landlords need to do their homework.
"Checking that you are on the most appropriate rate and product is best practice for all investors and this is what all buy-to-let investors should be doing," Grayson concludes.
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Take a SIPP ...
SIPPs are personal pension plans which let you (and/or your adviser) decide where to invest your pension contributions.
There is no income tax on any gains made, and no Capital Gains Tax (CGT) is payable either.
SIPPs are subject to the same tax benefits as standard personal pensions, as long as the investments made are on an 'approved' list drawn up by HM Customs and Revenue (formerly Inland Revenue). |
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Investments on the list currently include unit and investment trusts, equities, cash deposits and even futures and options. You are also allowed to invest in commercial property. Although property you own (say, an office, for example) may be bought with money borrowed from the pension fund, the property will then be owned by the pension fund - not you. But any growth in its value is free of income tax or CGT. In addition, the rent payable by you or your company to the pension fund can be offset against your profits. |
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You are not currently allowed to hold residential property within a SIPP, but that is to change on April 6th next year, when new pensions legislation is introduced. Residential property, whether buy-to-let or a second home, in the UK or abroad will become a permissible investment within a SIPP, with all gains free of CGT and all contributions up to £215,000 receiving full tax relief. To buy the property you will be able to borrow up to 50% of the value of the fund.
So, for example, if you have £100,000 cash sitting in your pension, you can buy a house worth £150,000. Some people believe this change will further boost the buy-to-let sector. But in fact, there could be a great deal of small print covering the changes to pension regulation issued before the April 6th 2006 deadline, so the excitement may be premature. And there are plenty of pitfalls for the unwary. Remember, pension planning is a complex science and it is essential that you take professional advice before proceeding.
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SIPP investor profile
SIPPs tend to be popular with higher net worth individuals (who are also higher rate taxpayers), putting aside significant amounts of money into their pensions.
That's because the dealing charges and management fees on SIPPS tend to be so high that they are only worth paying if you're investing at least a couple of thousand pounds a year. Generally, you need to have at least £150,000-£200,000 to invest in a SIPP for the charges to be competitive relative to many personal pensions. |
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