According to conventional wisdom, if something were easy, then everyone would do it. This is becoming increasingly true of the buy-to-let (BTL) investment sector: Until recently, this asset class was a lucrative way for investors to earn reliable income, but a maelstrom of regulatory changes have dampened its attractiveness.
I’ve written on challenges facing the BTL sector before, but now, I’ll take a look at some of the forces that are reshaping BTL into a niche territory for a smaller circle of investors.
Interest Rates
The most significant curb on BTL’s investment potential is an increase in the base rate—the first since 2007—to .05%. The Bank of England’s decision to raise rates comes as unwelcome news to BTL investors and landlords, who, for many years, were able to secure cheap mortgages for their properties as a result of the historically low interest rates and thus increase their profit margins. On account of the increased base rate, however, their mortgage payments will be higher, which means that they will earn less monthly income on their properties. Only two weeks after the announcement, the average rate for fixed-rate mortgages have already begun to climb.
The growing cost of mortgages means that fewer investors will be inclined to pursue BTL as an investment option. In fact, the evidence shows that’s exactly what’s happening: In September, in anticipation of the base rate hike, BTL mortgage lending fell by 9% relative to August totals. This retreat from BTL by investors means it will become an increasingly niche avenue for those who are willing to endure higher operating costs.
Budget Woes
Chancellor Phillip Hammond says that his forthcoming Budget makes home building a priority, but much to the chagrin of landlords and BTL investors, it is predicted to ignore their concerns and provide relief to a sector that has been saddled with higher costs and increased regulation in recent months.
“Whilst many landlords are still hoping for a U-turn on the interest restriction rules, which are likely to result in large tax increases, this seems unlikely and the best that property investors can realistically hope for is a respite from further changes, whilst everyone gets to grip with the new regime,” according to Rebecca Wilkinson, corporate tax director and property sector specialist at Menzies LLP, an accountancy firm.
If the government ignores the needs of BTL, then investors won’t feel confident pursuing it as an investment option and it will become the realm of a few specialists who can bear the costs and the headaches that come with it.
Despite the challenges surrounding BTL investment, there are still opportunities on the table for discerning investors. At Avantis Wealth, we’ve developed the F.R.E.S.H. Investment System that regularly generates average annual returns between 7-15%. For more information and to request a copy of your F.R.E.S.H. Investment Special Report, call +44 1273 447 299, email invest@avantiswealth.com, or visit our website.