Date Published 31 October 2015
As a mortgage consultant and director of an estate agency, I am increasingly asked: with property prices seemingly unstoppable, and interest rates low, is it a good time to get into the buy-to-let market?
Answering this question cannot start without an analysis of your current financial position, so unfortunately there is no quick and easy answer. This is where your financial or mortgage consultant can give you an idea of whether your circumstances make it an acceptable risk. A further question is whether you're looking for long term growth or income, which adds to the complexity of the answer.
The property market is driven by key fundamentals that are presently quite favourable - access to credit, interest rates, average wages and supply and demand. Let's look at these in turn:
1) Access to credit. The Mortgage Market Review in 2014 led to greater scrutiny of the affordability of mortgages. Lenders will now take a more detailed analysis of your post expenditure income and this has restricted access to mortgages for some people. More people are moving to self-employment which provides a problem for lenders as they're not as readily geared up to the changing employment market place. More than ever it is important to see a quality mortgage consultant, so always look at the qualifications that they have to help you, including tax planning qualifications if you are an investor.
2) Interest rates. These are at record lows, which means a lower cost of credit, making it relatively cheap to finance the property. With inflation at a very low rate, commodity prices low and central banks loosening monetary policy, it is hard to see them moving significantly in the near term.
3) Average wages. After a long period of standstill, average wages finally seem to be on the increase, recently annualised at 3.2% growth. This is higher than the rate of inflation which means more money in the average person's pocket, and also more money to spend on housing.
4) Supply and demand. This feels like the biggest driver for the current house price inflation. Supply is historically low; we are building, annually, fewer houses in the last decade than the decade prior to that, which was also a reduction in the amount of property built in the previous decade, despite an increasing population. However, there is currently 13 years' worth of supply being built, or due to be built, in and around London so we'd definitely avoid that area for investment! With an increased value of sterling and less tax breaks for foreign investors this could cause a headwind for demand and prices in London. Will this reverberate outwards?
People are also seemingly reluctant to sell; some can't afford the increased deposit for a larger house, some baulk at the stamp duty and other costs and there is reluctance to offload if your home keeps increasing in value, again constraining supply. With more people, demand naturally increases, as has demand from investors who now make up 19% of the property market - a record high. Investors don't need to sell to move up the property ladder so an increase in their share of the market naturally reduces supply.
If you look at returns on cash and bond investments and the volatility of stock markets, then property can seem a good option - above average income returns and capital growth. In fact, the Office for National Statistics saw average rents increase in the 12 months to July 2015.
A seeming negative for property is that credit is constrained and forthcoming tax changes (see previous news story). A good financial consultant can identify a suitable lender or create a financial plan to ensure that you get to where you want to be and this should be top of your list. The fundamentals are good for property, but it is expensive and it is trading at record income multiples.
The key to using property as an investment is planning for worst - you should therefore ask yourself:
- If interest rates rose, could you afford the repayments?
- How well is you portfolio balanced? Do you have enough cash, or other investments, to fall back on to weather any potential storms?
- Do you currently have the most efficient financing in place?
- Can you reduce your costs?
It is surprising how few people ask these last two questions. Only by looking at the bigger picture can a well-qualified mortgage consultant look at tax implications and efficient financing rates for your portfolio. A recent client had a portfolio of just 2 properties, yet we were able to save him nearly £10,000 a year in interest by looking at the bigger picture! Is it time to review your financing?
Remember that your portfolio is your business and that you need to explore all avenues of cost reduction. This will include tax accountants who are experienced in the property market and estate and lettings agents. It still amazes me that some landlords happily pay double digit figures, plus VAT, on their portfolio to be let through an agent in such a buoyant market. I have seen 15 – 16% paid, plus VAT, which is almost a fifth of your income removed before we even consider tax, void periods, repairs, accountant and finance fees, etc, eating into your yield. A quality agent is worth their fee as they will protect your investment, but the rates to sustain expensive shopfronts are ridiculous - so shop around.
@HOME Estate Agents offer a rate of just 7.5% (inc VAT) to fully manage your property investment, and, for a very short time only, are discounting this by a third to just 5% (inc VAT) fully managed.
Mortgage Consultant, BSc (Hons), Cert SMP, Cert CII (MP), Cert CII
Sales & Marketing Director, @HOME Estate Agents