In the current investment market, everyone is under increasing pressure. The recent mini-budget has shaken things up particularly and influenced the nature of various types of investment – one specific example being buy-to-let.

Here at Applewood Independent, our business is talking about investment. We have been analysing how these recent changes have affected the environment for buy-to-lets – like many other types of investments, there are benefits and downsides. 

Read on for our analysis of whether buy-to-let properties represent a valuable investment for you right now.

The current state of the market

Buy-to-let has become popular in recent years. Housing is in increasing demand everywhere – people want to be getting onto the property ladder, but cannot afford a mortgage. This means that they are having to rent. This means, in turn, that renting out properties is easily done.

However, there are increasing downward pressures and inflation to consider as well. We have very high inflation rates at the moment – currently around 10% – thanks to influences such as Brexit and the war in Ukraine. This means we have less money in our back pockets – our net pay is not as strong as it once was.

The money we do have is not stretching as far as it used to, either. We all know that the cost of a tank of fuel is more expensive. We certainly all know what gas and electric bills are looking like – even fixed tariffs aren’t safe, when they change they will become significantly more expensive. None of this is doing anyone any favours.

Because of the strength of the pound, interest rates need to go up to combat inflation and increase the attractiveness of UK bonds to foreign buyers. This rise might now be anywhere from 3% to 5% following the mini-budget – which is adding pressure as well. In general, people have less money to spend.

Mortgages

With rising interest rates, mortgages are going to become more expensive. Banks are becoming less willing to give out as many mortgages now – a recent news report tells us that £90,000 on average has come off every mortgage offer. This means that for someone who is considering going for a buy-to-let at this time, it is a tough decision to make.

How will this affect properties that have already been bought and already have a fixed-term mortgage? Well, this will affect things in terms of capital values. In any case, the prices of houses are shooting up through the roof.

Impact of the mini-budget

Until 25 September, I would have said that buy-to-let would have been an investment with more downsides to it than potential upsides. Certainly compared to 20 or 30 years ago, it is less viable to go for a buy-to-let now in capital value – back then, most buy-to-lets that people bought thanks to the housing boom made money (unless you bought in 2007).

The mini-budget has helped this by taking away some of the stamp duty. As buy-to-let purchases are done as second-home owners, there is an additional stamp duty that has to be paid. This “additional” stamp duty isn’t going anywhere, but the “regular” stamp duty disappearing will help the viability of purchasing buy-to-let properties.

Risks to consider

The primary risks to consider here are mortgages, costs, and property prices. If you were looking at buying a buy-to-let today on an interest-only mortgage with a small deposit – or worse, a variable rate mortgage – I think there are real risks around whatever it is you’re buying. 

The way that things stand today, it is going to wipe out whatever deposit you put in if it is too small, and you’ll probably go into negative equity. You should not be relying on property prices to continue to go up in the same way they have over the last few years.

The prospect of this investment making profits hinges almost entirely on the amount of rent you get versus the amount of costs that the property has. You need to consider carefully whether those costs will wipe out the rent for the year or indeed make a significant dent on the capital that you have invested.

Profitability

Properties bought today, especially with small deposits, are unlikely to become – in most cases – houses with values of around £300,000–£500,000. You are not going to make huge money unless you manage to buy a property for £100,000, spend £50,000 on it, then turn it around and sell it for £300,000.

However, there is so much competition when it comes to buying properties, and so many people looking into this, that the profit in terms of turning houses around is a lot less now than it has been in the past. For buy-to-let properties, it is going to be tough for the profit to be anything other than what is produced by the rent.

This also means that you have an extra pressure to be renting the whole year round. If the house is unoccupied, the costs, such as the mortgage, will continue without being offset by rental income – eating into any profits.

It isn’t all doom and gloom: buy-to-lets have been very profitable for a number of people in the past. However, in the environment we see today, there seem to be more downsides than upsides. 

If we thought that UK property prices were undervalued, things would be different – but I am not sure anyone could say this right now. In South Cheshire currently, an average house sells for £300,000. Buyers will be queuing up around the corner, prepared to pay the asking price or more – just to get their offer accepted.

Does that scream value? Sadly, buy-to-let has been unloved by the government for a long time now – thanks to the extra tax and the fact you cannot offset as much.

Final thoughts

To round up: buy-to-let is, at present, a tough buy in capital values. In capital terms, it’s unlikely to return the 10% per annum you need for it to be profitable (or anything remotely like that). The only possibility is if you bought remarkably cheaply and then invested money to turn it into a significantly more valuable property. Which of course is an option, but not always as easy as it sounds!

There is, however, a lot of competition in the market currently. Any property you do have also needs to have consistent rent – without any void periods – and very little being spent on it. With all this to consider, buy-to-let may not be the best place to put all your money.

Here at Applewood Independent, we are interested in everything with a pound sign in front of it! We are ready and waiting to talk with you about anything to do with your finances – from buy-to-let and investments, to pensions and inheritance tax.

If you’d welcome our input, expertise and experience, please get in touch by emailing me at alex@applewoodindependent.co.uk.

The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.

The value of your investment can go down as well as up, and you may not get back the full amount invested.

Past performance is not a guide to future performance.