Is Buy-to-Let Still a Viable Investment in 2019? Everything You Need to Know

Posted 7 January 2019 by Nick Parkhouse

Changes to buy-to-let rules have seen lending fall. But is buy-to-let still viable in 2019? Here's your complete guide...

Over the last couple of years, buy-to-let lending in the UK has fallen significantly. Changes to tax rules, slow house price growth, and even changes to tenancy regulations have resulted in many amateur landlords selling their property investments.

So, is buy-to-let still viable? Many experts believe that property offers excellent investment opportunities in 2019, so keep reading for everything you need to know about the state of the UK buy-to-let market.

The changes that have affected buy-to-let in 2018

Over the last two years, a number of changes to the buy-to-let market have reduced its appeal to many investors and activity in the sector has fallen.

Firstly, April 2016 saw the introduction of a 3% surcharge in stamp duty, adding thousands to the purchase cost of many properties.

Since the changes to Stamp Duty rules, landlords have faced a staged reduction on the tax relief they can claim on their rental income.

In April 2017 the government began to remove a landlords' ability to deduct mortgage interest from rental income before working out their tax liability. Landlords will continue to see this benefit slowly withdrawn until it is removed entirely in 2020.

2017 also saw the Prudential Regulation Authority toughen up buy-to-let lenders’ affordability checks. This increased the paperwork that portfolio landlords had to provide, and required landlords to provide more proof of earnings.

All these changes meant that the number of buy-to-let mortgages decreased sharply in 2016 and 2017, falling from a high of 117,500 mortgages handed out in 2015 to 74,900 in 2017, a two-year drop of 36%.

So, with all these changes continuing to take effect, is buy-to-let still viable? Here are several reasons to be positive about the sector.

Landlords now have a bigger choice of mortgages than ever

Over the last couple of years there has been huge competition between lenders in the buy-to-let market. This competition has seen the cost of buy-to-let mortgages fall, and there have been innovations in products offering incentives such as cashback, free valuations, and free legal fees.

This competition now means that landlords have a wider choice of buy-to-let deals than ever before. In May 2018, financial analysts Moneyfacts reported that, for the first time, the buy-to-let market offered over 2,000 products for landlords.

Ying Tan, CEO and founder of The Buy to Let Business and Buy to Let Club, says: “Lenders have done their best to ensure property investment remains an attraction proposition by cutting their rates to record lows and I imagine we’ll see more of this in 2019."

Many lenders have also changed their criteria to allow buy-to-let mortgages to be offered to limited companies. Landlords are increasingly holding their property in limited companies in order to benefit from tax-efficiency, and Ying Tan believes this will continue in 2019.

He adds: “Next year will see the continued growth of limited company buy-to-let as the rollout of the tax changes continues and we’ll see increased regulation around the rental market as a whole."

Rental yields will fall, but continue to be strong in certain areas

Over recent months buy-to-let rental yields have struggled, and a recent report suggested that rental yields will continue to come under pressure in 2019 and beyond as house prices rise faster than rents.

The report by Shawbrook Bank and the Centre for Economics and Business Research forecasts that average yields will fall from 4.9% in 2017 to 4.1% in 2023.

However, rental demand remains strong and so this will continue to support rental yields. Mortgage expert Andrew Montlake says: “It is basic economics. We aren't building enough homes. People can’t buy, and so there is demand for rental properties and for landlords.”

Getting a good rental yield will also depend on where you invest. Current rental hotspots include the North West of England; in particular the cities of Manchester and Liverpool.

The Centre for Economics Business Research report looked at the rental yields in each of the UK regions, and put together a comparison to show you where the real investment hotspots are. The table below shows the regional variations and confirms that there are still good yields to be made in many areas.

Region

Monthly rent

House prices

Yield

North West

 £683

 £152,406

5.40%

Scotland

 £630

 £142,267

5.30%

North East

 £519

 £123,419

5.10%

Yorkshire/Humber

 £620

 £151,779

4.90%

Wales

£589

£149,590

4.70%

West Midlands

 £669

 £183,528

4.40%

East Midlands

 £609

 £178,671

4.10%

London

 £1,538

£478,975

3.90%

South West

£794

£245,180

3.90%

East

 £895

£283,225

3.80%

South East

£985

£317,392

3.70%

It is also worth bearing in mind that returns from other assets, particularly shares, have been less than impressive in the last 12 months. For example, the FTSE 100 index has fallen by 1,200 points since May 2018 alone.

Industry expert Howard Goodall says: "The returns on buy-to-let are not what they have been in the past. But property appreciation has fallen as well. Post-financial crisis, the returns on most assets have also fallen.”

Outlook good for professional investors

With low rates, good potential yields and a great choice of buy-to-let mortgages available, the buy-to-let sector still offers excellent investment potential.

This is particularly true if you plan to invest for the long-term, and experts recommend that you take specialist buy-to-let advice to help you understand the recent changes to the sector.

Karen Bennett, ‎managing director for Commercial Mortgages says: "Whilst the series of government and regulatory changes have had a significant impact on the sector, we have seen the impact felt more heavily amongst the 'amateur' landlord community which has presented growth opportunities for professional investors.

"Recent political turbulence has had an amplifying effect on investor confidence but positively, the market remains buoyant for those with a long-term strategy who draw upon specialist advice to fully understand the impact of these policy shifts."

 

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