The buy-to-let market has already seen some significant changes in 2016, perhaps most significantly the increase in stamp duty on any property you own other than your primary home. What this means for those looking to invest their money in property is that the market may not offer the same kind of sound investment that property has generally always been considered.
The hike in stamp duty means that any buy-to-let property now attracts a 3% surcharge; a considerable increase from the previous rate. For example, under the old system, if you were buying property for £200,000, you would pay nothing on the first £125,000 and 2% on the remaining £75,000, resulting in a bill of £1,500. Now, 3% is levied on the first £125,000 and 5% on the £75,000, which works out on a much larger £7,500 bill. This essentially makes the wait to get this money back and earn a comfortable profit through rental payments much longer.
The longer term prospects for the financial health of buy-to-let don’t look much brighter. From 2017, new limits are being introduced on the amount of mortgage interest that can be offset against rent payments. It’s a complicated system that some predict will transform profitable buy-to-lets into loss-making properties in around 70% of locations, which in turn will force many landlords to either raise rents considerably or put their properties back on the market. There will also be cuts to the ‘wear and tear’ allowances, which allow costs for maintenance to be offset against rental income, making achieving a profit even harder to achieve for landlords.
There are also plans in the pipeline from the Bank of England for greater restrictions on who will be eligible for a buy-to-let mortgage. These will mean a wider consideration of a potential landlord’s financial situation, including scrutiny of their monthly income and outgoings, as opposed to just consideration of the rental income of the property under the current system.
Ultimately, if you are looking to enter the buy-to-let market soon, the way to avoid being hit by these changes is to ensure your investments aren’t solely in property. A diversified portfolio that doesn’t rely solely on placing your money in bricks and mortar means that, even if matters in the property market don’t go your way, you will still be left with a number of other sound investments.