Is Buy-to-Let Still A Good Investment? | moneyfacts.co.uk

Derin Clark

Derin Clark

Online Reporter
Published: 24/09/2020

At a time when the stock markets are volatile and savings rates remain low, many with lump sums to invest are looking for alternative forms of investments with buy-to-let (BTL) becoming increasingly popular, especially with the raising of the stamp duty threshold to £500,000 until March 31 2021 making buying a property more attractive to investors.

In fact, lending within the BTL sector is up as figures released by the Financial Conduct Authority (FCA), earlier this month revealed that gross mortgage lending for BTL purposes, which includes house purchase, remortgage and further advance, during April to June 2020 was 14.4%, an increase of 1.2 percentage point from the same period the previous year. This increase was before the stamp duty threshold increase was introduced, so could be higher still during the second half of 2020.

Clearly, BTL is being considered an attractive investment opportunity by many, but with the impact of tax changes and more cautious lending from mortgage providers is BTL still a good investment?

Is BTL still a good investment for first-time landlords?

Just as mortgage lenders are currently cautious about lending to first-time buyers with low deposits, deals aimed at first-time landlords have also seen a fall this year. Our research has found that the number of BTL two-year fixed deals aimed at first-time landlords with a 75% loan-to-value (LTV), has fallen by 88 since March, and the number of deals at a 60% LTV has fallen by 13 since March. Meanwhile, first-time landlords looking to lock into a five-year fixed deal at 75% LTV will have seen their choice in products fall by 111 since March, but the number of deals available at 60% LTV has risen by one during this same period. Year-on-year the number of deals available to first-time landlords are also down for two year and five year fixed at 75% LTV, down 45 and 20 respectively, and two year fixed at 60% LTV, down by 14. Only the number of deals at a five year fixed 60% LTV have increased, by seven, year-on-year.

 

Number of BTL products available to first-time landlords
  September 2019 March 2020 22 September 2020
Number of deals two-year fixed 75% LTV 204 247 159
Number of deals two-year fixed 60% LTV 91 90 77
Number of deals five-year fixed 75% LTV 231 322 211
Number of deals five-year fixed 60% LTV 89 95 96

 

Along with a fall in deals, first-time landlord average rates have been rising. Since March, the average rate on a two year fixed 75% LTV first-time landlord deal has increased from 2.83% to 3.01%, and the average first year fixed rate at 60% LTV has increased from 1.89% to 2.41%. It is a similar picture in the five year fixed chart, with the average rate at a 75% LTV increasing from 3.39% in March to 3.63%, and the average 60% LTV rate increasing from 2.44% to 2.98%. Comparing rates year-on-year, first-time landlord average rates have increased on deals at 60% and 75% LTV in both the two and five year fixed BTL charts.

 

Average BTL rates available to first-time landlords
  September 2019 March 2020 22 September 2020
Average two-year fixed 75% LTV rate 2.90% 2.83% 3.01%
Average two-year fixed 60% LTV rate 1.98% 1.89% 2.41%
Number of deals five-year fixed 75% LTV 3.47% 3.39% 3.63%
Average five-year fixed 60% LTV rate 2.56% 2.44% 2.98%

 

First-time landlords looking for a property to invest in will also be disappointed to see that property prices have been rising, with the Nationwide House Price Index released earlier this month showing that the average property price rose by 2% month-on-month. But, many experts believe that the increase in property prices is likely due to a release of pent up demand for house moves in the months following lockdown, combined with the increase of stamp duty threshold by the Government in July. Although all dependent on how the economy performs, number of redundancies and whether there is another nationwide lockdown, many experts are expecting property prices to fall towards the end of 2020 and into 2021.

Rising property prices, combined with a reduction in first-time landlord deals and increasing mortgage rates, makes investing in a BTL seem like a poor investment for first-time landlords in the current climate. Prospective landlords should still weigh up how investing in a BTL compares with other types of investments, as well as thinking long-term and considering the region. In London, for example, rents have been falling as many renters are looking to move out of the city as they are no longer having to commute to work and instead can work from home, but outside London rents have been rising. In addition to this, although the Coronavirus pandemic is having a significant impact on property prices, mortgage rates, and rents at the moment, the pandemic will not last forever and, as such, property could still be a good long-term investment for first-time landlords.

For more information about investing in a BTL property read our story Would investing £40,000 into a BTL property offer better returns than a savings account?.

Is BTL still a good investment for landlords with a property portfolio?

Established landlords with a portfolio of properties are facing a very different BTL mortgage market than first-time landlords. Although since March the number of deals available across the entire BTL market has fallen, rates have also decreased. The number of two year fixed deals available at a 75% LTV has fallen from 371 in March to 228, and the number of 60% LTV deals from 124 to 119 during this same period. Meanwhile, in the five year fixed BTL chart the number of deals available at a 75% LTV has fallen from 451 to 248 since March, although there has been a slight rise in the number of 60% LTV deals, from 133 to 138, during this period. Again, year-on-year the number of deals on two and five year fixed rate deals at 60% and 75% LTVs have all fallen, expect for five year fixed deals at 60% LTV, which have increased by nine.

 

BTL total number of deals
  September 2019 March 2020 22 September 2020
Number of deals two-year fixed 75% LTV 342 371 228
Number of deals two-year fixed 60% LTV 129 124 119
Number of deals five-year fixed 75% LTV 374 451 248
Number of deals five-year fixed 60% LTV 129 133 138

 

Here the similarities with first-time landlord deals ends as average rates across all BTL deals have fallen since March. The average rate on a two year fixed deal at 75% has fallen from 2.29% in March to 2.17%, and the average rate at 60% has decreased just slightly from 1.80% to 1.79% during this period. In the five year fixed BTL chart the average rate at 75% LTV has fallen from 2.56% to 2.40% and the average rate at 60% from 2.12% to 2.04% between March and today. Year-on-year, average rates on all two and five year BTL deals at 75% and 60% LTVs have fallen.

 

Average BTL rates
  September 2019 March 2020 22 September 2020
Average two-year fixed 75% LTV rate 2.34% 2.29% 2.17%
Average two-year fixed 60% LTV rate 1.84% 1.80% 1.79%
Average five-year fixed 75% LTV rate 2.65% 2.56% 2.40%
Average five-year fixed 60% LTV rate 2.18% 2.12% 2.04%

 

As well as this, landlords with existing properties will likely be benefiting from house price rises as it will probably mean that the properties they have invested in have increased in value. Saying this, landlords within London may have had to reduce rents as many renters choose to move out of the city, while landlords have also been impacted by tenants being unable to pay rents due to being furloughed or made redundant.

With house prices at a high and the challenges currently facing some areas of the BTL sector, landlords may be tempted to reduce their property portfolios by selling off some of their properties. Landlords considering this should keep in mind that rents in areas outside of London have continued to rise during 2020, which together with lower mortgage rates, could mean that they are able to get a better return on their investments now than at the beginning of the year. And, if rents continue to rise and BTL mortgage rates stay low, in the long-term BTL could remain a lucrative investment for landlords.

How have tax changes impacted BTL investments?

Landlords that have been investing in the BTL market for a number of years may have seen the returns from their investments reduce over the last few years as the Government added a 3% surcharge in stamp duty on BTL properties, as well as reducing mortgage interest relief in 2017. These tax changes, along with the slowing of the housing market, and potential fall in the coming months, has resulted in BTL not being as profitable an investment as it once was. This means that before investing in BTL, investors should ideally speak to an independent financial advisor to discuss whether it is the right investment for their individual circumstances.

Disclaimer

Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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