The UK has built a strong rental sector over the past decade, as more private landlords have moved into the market. However, the effects of the credit crisis, coupled with recession and the collapse of the housing market, has left some of those same landlords struggling with falling rental income and potential negative equity.
Buy-to-let is a long-term investment where the landlord aims to make a small profit on the rent received and – hopefully – a larger profit on capital appreciation. However, it is not always straightforward. For example, costs can soar if you buy a property that proves difficult to let or have problems with tenants. In addition, if the property is not well maintained or the market falls, the capital value might be affected.
Right now, prospective landlords are also finding it harder to obtain a mortgage, with lenders insisting on large deposits – generally at least 25% – and your total borrowing will be closely scrutinised to ensure that you are able to cover all the costs in the event that you have no tenant. Nevertheless, there are opportunities and financing options available. Larger deposits will likely bring a better deal and it is therefore wise to talk these through with a financial adviser first.
Many landlords opt for an interest-only mortgage as these are cheaper and the interest can be written off against any tax liability, but it is worth remembering that, at the end of the term, the capital debt will still be there and will need to be repaid. Over a number of years, it is possible that property prices will increase, allowing you to pay off the capital debt by selling up; however, there are no guarantees. Regular savings invested either elsewhere to build a lump sum or used to slowly reduce the capital debt will, however, help to predictably make sure the debt is repaid at the end of the loan.
Finally, with future interest-rate movements an unknown quantity, you might find that higher rates could swallow up any rental profit. If you are worried about this, it might be worth looking at a fixed- or capped-rate loan so at least you know what you’ll be paying each month. Above all, if you are considering an investment in property, you need to ensure that you understand the market – and don’t be rushed into your decision.
Steve Martin is Partner at Watsons Solicitors.
WE ALWAYS RECOMMEND YOU SEEK INDEPENDENT FINANCIAL ADVICE BEFORE CONSIDERING ANY MORTGAGE. YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. THIS ARTICLE SHOULD NOT BE CONSTRUED AS ADVICE.