Many people wish for the day when they can buy a house, rent it out, and then sit back and watch the money come in, right? It sounds great, but there’s much more to buy-to-let properties than meets the eye. As mortgage brokers, we want you to know all the facts before you make any choices. With 3% stamp duty surcharges, many new laws and rules, and high tax rates, knowing what to expect when applying for a buy-to-let property or keeping your present buy-to-let mortgage deal is essential.
First of all, the Bank of England said that by the end of the year, buy-to-let landlords’ monthly payments could go up by £175, and a fifth of landlords’ monthly payments could go up by more than £300. Naturally, this means that many landlords may no longer be able to afford to own a buy-to-let property because the rent they receive isn’t enough to pass the higher stress test. Instead, they may have to sit on a high SVR, sell the property, or reduce their mortgage, which not everyone can do.
Click here to learn more about stamp duty.
The tax benefit of renting doesn’t work as it used to, so Buy-to-let mortgages are no longer tax-deductible. This means that many landlords will lose money over the next few years. Because of this, buy-to-let has become less profitable for landlords with mortgages, and many have left the business. Those who are still in it are thinking about how to change to the new market conditions. On top of all this, the rules are also getting stricter.
The Renters’ Reform Bill, which includes a set of changes to protect renters, is scheduled to be discussed and voted on in Parliament very soon. And by 2026, all newly rented homes should have an Energy Performance Certificate (EPC) grade of C or higher. If this isn’t possible, you must pay £10,000 for an exemption. Some good things about this include the possibility of a tax credit and the fact that renters’ energy bills will go down, giving them more money to pay rent and making it less likely that they won’t pay rent.
We always believe that “It’s not all bad news”. There are some excellent things about BTL in 2023. If you’re an owner with a lot of cash, you may be in a good position because rental yields go up as rents go up, so there will be some good properties for sale in “distressed sales. Also, many first-time buyers won’t buy a home this year because of higher interest rates, stricter affordability estimates, and fewer 95% loan-to-value mortgages. Instead, they’ll keep saving money and wait until next year. But they still have to have a place to live. So, the desire for rentals will continue until 2023, and rents will keep going up quickly. They may slow down this year, but they won’t go down.
Click here to learn more about investing in Buy To Let property.
Still not sure what you should do? We get it, it’s a lot, but one option could be to incorporate your BTL by buying the property under the name of a limited liability company. If your property is in your name, you could pay 40% tax on your income if you’re in a higher tax band. However, if you set up a limited company, you’ll pay the lower corporation tax, currently 19%. This year, though, it’s likely to go up to 25%, which will hurt your income again.
And finally, some lenders are getting rid of stress tests now that rates are decreasing. This means they will offer goods with lower interest rates and arrangement fees. Even though some recent changes make buy-to-let less appealing to some buyers, it can still be profitable if done right. Even though rental yields have decreased, it’s important to remember that capital growth is also a perfect part of investment in real estate.
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