This information should not be interpreted as financial, tax or legal advice. Mortgage and loan rates are subject to change.
What strategies can the next generation of buy to let (BTL) investors implement to succeed in the face of the increased taxes, regulation, and higher mortgage rates?
Over the past few years, landlords have sold almost a quarter of a million more properties than they have purchased, and this trend appears likely to continue, with most recent sales coming from retirees.
Higher buy to let mortgage rates have made it difficult for some prospective investors, who are keen to achieve better yields.
According to Moneyfacts, the average two-year fixed rate mortgage for BTL investors currently carries an interest rate of 5.62%, up from 3.22% a year ago.
This represents a significant increase in monthly payments for landlords, with a £200,000 interest-only mortgage now costing £937 per month, up from £537 a month a year ago.
Average rents in the UK have increased by 9.8% over the same period, rising from £1,078 to £1,184 per month according to HomeLet, but some landlords are still earning less each month on average than they were a year ago.
However, there are several ways that new and existing investors can overcome these challenges.
Limited company approach
To mitigate the impact of higher costs, one approach is to incorporate and buy properties through a limited company buy to let mortgage, instead of as an individual.
By purchasing through a limited company, investors can use their entire mortgage interest to offset rental income before taxes.
It’s important to note that individual circumstances can affect whether it’s beneficial to set up a limited company or not, as there are also drawbacks such as higher mortgage costs.
Commercial Trust has written a guide on buying property through a limited company. However, to be clear on if this is the right choice for you; you should get tax advice from a qualified professional.
High yield investment types
To change strategies, you could consider buying different types of property, which typically offer higher yields.
Houses of Multiple Occupation (HMO), bought with an HMO mortgage, fall into this category because there are multiple rental incomes from each tenant, to cover one mortgage payment.
Converting houses into HMOs is a popular option for landlords, but it often involves permits and additional costs.
Landlords should always check with their local authority and clarify the type of licence required before converting a property into an HMO.
Holiday let mortgages are also being considered by more and more new and existing landlords.
Given tenants stay for short periods, but typically pay a higher rent than you would receive over the same period for a long term let, yields can be very favourable. There can also be tax benefits, because holiday lets are automatically defined as companies for tax purposes. Again, seek professional tax advice for clarification on this.
Adopting a long-term approach is crucial for landlords. Investing in property has significant upfront costs, and to recoup them through rental income takes time.
Changes in the economy and in the buy to let industry can affect the profitability of renting property, and as with any other business, landlords have to adapt to remain successful.
Nonetheless, even during the significant impact of the cost of living crisis and after changes in the PRS, data from USwitch released this year, shows the buy to let market is still performing strongly.
Over the long term, rental rates usually increase in line with inflation. Although rents have risen significantly in recent years, this trend may help ease the difficulties faced by landlords.
Check mortgage rates online
If you are interested in considering your investment options, it can be helpful to check current interest rates to assess the costs involved. Commercial Trust has the following available to you:
- Use our buy to let mortgage calculator to find buy to let, HMO , limited company and holiday let rates
We also have a:
Alternatively, get in touch today to chat to one of our expert mortgage advisors.