Welcome to Buy to let
The phrase buy-to-let can refer either to the investment strategy
of buying a residential property to be let for profit; or to a
particular category of mortgage used to purchase a property for
letting.
For many years landlords have invested in residential property to be
let for profit, but since the mid-nineties there has been rapid
growth in the property market leading to a surge in demand for
rental property which is being exploited by many mortgage providers
keen to encourage new amateur landlords.
Benefits and risk
As for all property rental, the benefits for a buy-to-let landlord
can include a stable income from rental receipts, as well as an
accumulation of wealth if house prices go up over time. Rising house
prices in the UK have made buy-to-let a popular way to invest. The
main risk is that the property might not be occupied for all 365
days of the year, while the owner still has to pay a monthly
mortgage payment. Also, buy-to-let landlords would suffer along with
all property owners should prices fall.
Yields
Recent research by BDRC for Alliance & Leicester showed that 71%
make a profit, but 29% break even or make a loss.
Buy-to-let mortgages
Buy-to-let mortgages have been on offer in the UK since the late
nineties; they are specifically designed for investors to borrow
money to purchase property in the private rented sector in order to
let it out to tenants.
Lenders take different approaches. The amount of money investors can
borrow is determined by the rental valuation of the property.
Usually the annual rental income has to cover a certain percentage
of the mortgage repayments, somewhere between 120% and 150%. This is
to allow surplus rent to cover other costs such as property
maintenance and void periods (periods when there are no tenants
living in the property and therefore no rental income).
Typically the interest rates that are offered on BTL mortgages are
fairly close to residential mortgage rates but will on average be
higher and typically charge higher fees. This is due to the
perception amongst banks and other lending institutions that BTL
mortgages represent a greater risk than residential owner-occupier
mortgages.
This type of investment has become very popular in the UK over the
last five years or so, as house prices have dramatically increased.
Another reason for their popularity is the tax advantages that are
available to UK BTL investors. Rental income is considered in the
same way as salary, and is therefore often taxed at 22% or even 40%.
However, landlords can deduct costs from the taxable portion of
their rental income, and these costs can include the interest
portion of their BTL mortgage repayments as well as maintenance
costs on the property. This tax set-up has made BTL investments more
popular over the last few years.
Recent credit problems have had some investers maintaning the same
percentage of equity in the property should prices fall and so
rapidly find money to cover these downturns
Effects on Society
In the UK, "buy to let" has attracted some negative publicity. It
has been described by some as the epitome of what is wrong with
British society. The basic ideas behind buy to let (according to
this analysis) are "How do I get someone else to work for me?", "How
do I get money without having to work?" and "How may I leverage my
privileged position to enable me to make further gains at the
expense of my fellow citizens?". This forms much of the basis of
real estate investment. Buy to let owners (it is argued) can
effectively do little work and yet still receive substantial
incomes, not only making money from rent, but potentially realising
large capital gains on the sale of their housing stock. The
suggested result in the UK is that of a wealth divide never seen
since Victorian times. Buy to let, as a form of real estate
investment, together with complicit lending practices and
legislation, has arguably been one factor behind the huge rise in
house prices in the UK since the late 1990s. First time buyers
frequently struggle to get a foot on the housing ladder.
One suggestion is that the main reason for rising house prices is
one of straightforward supply and demand: the number of households
has been rising faster than the number of homes. In these
circumstances, there are increasingly too few homes to go around,
and the price is forced up. This trend has been the case in Britain
since 1992. A counterargument to this, however, is that rents have
not increased in line with house prices, which is what one might
expect if a genuine shortage of dwelling units were the sole or main
reason for the increase in purchase prices.
Another suggested effect of BTL is that buy to let landlords tend to buy
property that the first time buyer would otherwise have tended to buy
therefore forcing up the price in this market and forcing the FTB to
rent a property of a landlord rather than being able to buy the property
instead which has been shown. This would make BTL a type of monopolistic
strategy.
General disillusionment with the property market has resulted in the
boundaries becoming blurred between the perceived dangers of buy-to-let,
the existence of a property bubble and the global credit crunch that has
made it harder to obtain mortgages at attractive rates for some
customers.
Assured shorthold tenancy
One of the key innovations required for widespread property investment
was the reform of tenancy agreements and specifically the introduction
of the assured shorthold tenancy (AST) agreement.
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