Financial planning expert Martin Stewart explains
The answer is simple. Yes. No. Maybe..? In truth, the answer depends on the individual. There’s never ‘one size fits all’ when it comes to finance; what might be right for one of our clients could be totally unsuitable for another. When it comes to buy-to-let, especially, there’s a lot more to it than just throwing your money at a property and reaping the rewards.
At the moment, it seems as though everyone and their hairdresser wants to race into buy-to-let, but just like your mum told you at school, just because everyone is doing something, that doesn’t mean that you should be. Internet start-ups in 1999, anyone?
Firstly, investing in buy-to-let should never be a decision made in isolation; it should form part of a well thought-out financial plan. As with any investment, property doesn’t come with a guarantee, so it’s important to stress test the investment – both now and in the future – and manage your expectations. Research where to buy and accommodate any problems that are likely to arise before you make any decision. Then ask yourself – does buy-to-let fit in with your bigger financial objectives?
If, for instance, you have £100k lying around and it’s earning very little interest in the bank, plus you fit the criteria laid down by the banks, then you could be looking at a mortgage rate of 2%. On a £300k loan, it could cost you as little as £500pcm for interest only on a buy-to-let mortgage. Factoring in average rental prices and booming rental property demand, what’s not to like?
As for timing…well, there’s no denying that demand for rental properties isn’t going anywhere in a hurry, despite what David Cameron has to say about first time buyers. Yet prices have risen much faster than rental yields, making it harder at present for buyers to meet the bank’s tough application criteria. Unfortunately, you will rarely buy an investment property for income in London any more.
That said, the market has improved in terms of competition between banks eager to increase their exposure to the booming buy-to-let market. New entrants have shaken up the longer term specialist lenders, and the return on buy-to-let for the banks is much greater than lending on residential purchases. In an era of low interest rates, mortgage providers are now battling for market share.
Maybe buy-to-let is, financially, perfect for you. You have the deposit. You’ve been offered a great deal on a buy-to-let mortgage. You’ve found the perfect area for a great monthly rental return on your investment. Yet there’s another crucial element to factor into your decision, and it’s not financial.
Do you really want to be a landlord? It’s so often overlooked by investors eager to make the most out of buy-to-let, but being a landlord is a great responsibility, legally, financially and morally. You are providing someone with a home to live in, not just dabbling in an investment because your friends are.
Fundamental regulatory changes also look set to take place in the buy-to-let market. The new EU Mortgage Credit Directive, coming next march, will impact on some minor elements of the existing buy-to-let market and only last month George Osborne intimated that he is likely to pass the Bank of England new powers over the buy-to-let market “as soon as possible”.
If you really want to reap the rewards of buy-to-let, you have to understand the obligations and implications of being a landlord. It’s an extremely expensive market to enter and it could be equally expensive to exit in a hurry, what with selling costs and possible Capital Gains Tax. People come to us for a buy-to-let mortgage with no idea of the tax implications it brings. If you haven’t spoken with an accountant or a financial adviser before putting in an offer on a buy-to-let property, you’re probably not ready to be a landlord.
Martin Stewart is managing director of London Money. Martin has worked in Financial Services for the past 22 years and in that time has gained a wealth of knowledge and experience. Martin believes that financial planning should follow the London Money mantra of being simple and smart and he takes that approach with his clients regardless of their position. Follow them on Twitter.