Buy to let was coined as a term in the UK in 1995, but the practice of taking out mortgages on a property with the express intention of privately letting it had existed for some time before then. The 1988 Housing Act introduced ‘assured shorthold tenancies’ and overrode much of the legislation contained in the Rent Act eleven years earlier, reducing security of tenure for tenants and removing many restrictions on landlords. The prospect of becoming a landlord became more attractive and the number of buy to let mortgages has since increased significantly.
Lending peaked between 2006 and 2008, but the subsequent shrinkage of the market has not been indicative of lack of returns – simply of stricter lending criteria curbing the abundance of loans. Recent years have seen a small but steady growth, as demand from both buyers and renters continue to push house prices and rent up. This progression is particularly prevalent in the capital; Rightmove’s October 2012 House Price Index notes a 6.2% increase in house prices in London over the past year (comparing against a regional change of 1.5%; all regions have demonstrated an increase since September, with only the South East and Yorkshire-Humberside showing a decrease since October 2011). The popularity of buy to let can be attributed in part to its potential yield in both the long and short term; with rent set at 125% of the interest-only aspect of the mortgage repayments, landlords can generally make a profit through rental income (the margins increasing in line with the size of the property portfolio) before selling the property after it has appreciated in value.
As of 2012, the number of buy to let loans in effect stands as 1.4 million (up 17% from last year). Detractors of buy to let argue that the number of properties being bought for private rental is a contributory factor to the continued rise of house prices, but the ratio of buy to let investors to first time buyers over the last decade is less clear-cut in determining a causal relationship; high demand for the relatively low supply of properties in the UK is likely the largest determining factor. Those who support buy to let claim that a greater profusion of rental properties gives tenants a wider choice, and thus higher quality, of properties; this also means that landlords have it easier to attract the ‘right tenants’ for their property.
The average gross rental yield for UK property currently stands at 5.4%, ranging from 3.9% (in Belfast) to as high as 8.4% (in Liverpool). Whilst these figures might not represent as high a return as other investments, property is certainly performing better than the equity market, and demand is unlikely to decrease in the coming years. This means that rent will likely continue to appreciate in line with inflation.
This return is in addition to the tax breaks that buy to let landlords in the UK can enjoy. The UK is very popular with both local and overseas ‘jet to let’ investors because many expenses incurred in the running of a property can be offset against their income tax bill, including professional fees (letting agents, solicitors and accountants, for instance), travel, insurance premiums, mortgage interest rates, repairs and maintenance and losses on the sale of the property.
However, one should bear in mind that property is far more ‘hands-on’ than many other types of investment. Thorough research of an area, including development and local rates, is required, as is knowledge of the target demographic. A sound marketing strategy and an idea of projected monthly income and outgoings are advised. Whether or not a letting agent is employed in the day-to-day running of the property, a landlord needs to be well-versed in relevant legislature and know their rights and obligations.
Written by Brian Godfrey on behalf of TurnKey Landlords, the specialist buy to let mortgage arm of TurnKey Mortgages. TurnKey Landlords provides an expert buy to let mortgage brokerage service and a dedicated advice and guidance resource for landlords in the UK.