Most of this year has been overshadowed by soaring inflation and interest rate hikes. Now, the pound has fallen to an all-time low against the dollar and the euro following the announcement of the UK government’s ‘mini budget’ initiative – a new measure that will involve large tax cuts through further government borrowing, impacting households, businesses, and investors alike with ever-growing costs.

In this post, we’ll be focusing on the effect that rising costs have been having on the property investment sector, and how new tax rules and regulations and rising mortgage rates have been driving buy-to-let investors away from owning and managing physical property. We will also highlight a possible solution through passive ways of investing in property in the current financial climate whilst securing regular returns.

What are the new rules for landlords?

A recent independent survey revealed that 61% of retail investors feel that buy-to-let (BTL) investing has lost its appeal now that many tax and property rules have changed. New regulations have been eating into their profits, leaving their margins too narrow to make the investment worthwhile.

One of the main changes for private landlords concerns mortgage interest tax relief. Prior to 2022, higher-rate taxpayers could claim 40% tax relief on their mortgage interest, which generously reduced their tax bills. In the last couple of years, however, the government introduced a basic tax credit of 20%, making that the maximum tax relief across all tax brackets. Aside from higher-rate taxpayers now being able to claim back less tax on their mortgage repayments, the new system could also force some landlords into a higher tax bracket depending on their other income sources besides rental income. The below chart shows how landlords’ expenditures are currently calculated under the new tax rules:

As an example, if a landlord earns £950 a month in rental income with £600 a month in mortgage repayments, the projected expenses under the new tax rules would be:

·         The full £11,400 income would be taxed

·         £7,200 in mortgage interest

·         Tax credit of £1,440 (20% of mortgage interest)

·         Tax bill of £840 for basic-rate taxpayers (no change to previous rules)

·         Tax bill of £3,120 for higher-rate taxpayers (double the amount vs. previous rules)

Another important change for potential landlords to be aware of is stamp duty. To help buyers during the pandemic, the UK government introduced a stamp duty holiday, which meant that BTL landlords could pocket an average saving of £2,000 without this additional cost that would normally apply depending on the value of the property. With the stamp duty now back to normal, here are the standard rates for property investors to keep in mind:

If your next property purchase means you’ll own more than one property, there’s also a 3% surcharge on the above rates. This means that SDTL rates start at 3% on sub-£250,000 properties, up to 15% on a property value above £1.5m. To put that into perspective, if you were to buy a £300,000 rental property, your stamp duty would be £9,000 higher than that of a first-time buyer.

Affordability and borrowing difficulties

Let’s not forget that UK house yields reached record low levels this year, which has significantly affected profitability and fuelled a decline in landlords. Now that the value of the pound has also plummeted, landlords are still being driven away as some mortgage deals have been taken off the market and borrowing is becoming increasingly difficult. In response to the tumble of the pound, interest rates are forecast to keep rising, following seven inclines this year already. Financial predictions say that rates could grow from 2.25% to 5.8% – that’s more than double. To put that hike into perspective, chief UK economist at Pantheon Macroeconomics, Samuel Tombs, explains that “the average household refinancing a two-year fixed mortgage in the first half of next year would see monthly payments jump to £1,490 from £863. Many simply won’t be able to afford this.” For potential landlords, the prospects of investing in BTL property could become even more challenging – perhaps even unrealistic. This could encourage a further decline in landlords and, therefore, a decline in homes for many tenants, which has already halved between March 2019 and March 2022.

Expensive mortgages could help explain why the survey highlights the complexity of property investing as a factor that’s deterring prospective landlords from BTLs. It’s been found that “two-fifths of investors (40%) said they would be inclined to invest in real estate without the complications that come with property ownership. Among those aged 18-34, the figure rises to 67%.” This perspective is a result of most respondents also expecting house prices to continue to rise over the next year or so, which adds to the already tricky borrowing process, especially for first-time BTL buyers.

Positivity towards property investing remains

In terms of general attitude, the survey found that 59% of investors continue to recognise property as a powerful investment even in the current financial climate. However only “37% of respondents are inclined to consider fractional investment as a way of gaining a stake within the real estate landscape.” So, despite property still being acknowledged as a strong asset class to invest in at present, the number of investors that are willing to remain active in the property market is very limited.

But some professional opinions are more enthusiastic about the current changes to the BTL investment market. Some brokers are seeing this as a “cyclical shake-out” that simply gives BTL landlords a chance to reassess their position as the tax and stamp duty changes detailed earlier actually came into gradual effect in the last 2-5 years; tax changes were actioned in 2017 and the stamp duty holiday ended in October 2021. The temporary rates in 2021 meant that you didn’t pay Stamp Duty Land Tax (SDLT) on a property value of up £500,000. This has now reverted back to the original value of up to £250,000. Edinburgh Mortgage Advice owner, Mark Dyason, comments that the new tax rules “combined with rising prices have acted as a catalyst to push the more reluctant or wavering landlords into selling up.”

How to benefit from property investing in the current market

Stability and reliability are two key factors that are currently missing for many property investors. With yields falling, mortgage rates rising, and new tax rules reducing potential profits, it can be difficult to see what might be in it for you.

At Propiteer Capital, our recession-resilient Propiteer Capital Property Bond gives investors hands-off exposure to three core asset classes: residential assets, developing branded hotels, and high-value built-to-sell developments. All the projects within our bond are sourced in transient and robust locations across the UK and Ireland, and investor funds are secured against high-quality asset-backed projects, providing security against your investments. Your funds are also spread across a diverse pool of property developments, helping you balance your portfolio easily and conveniently.

In this volatile market, the Propiteer Capital Property Bond can help investors benefit from stable, fixed-rate returns of up to 12% p.a. with a range of payment options and frequencies, so you can stay in control with your chosen fixed-rate on a rolling monthly basis, knowing that your returns won’t change even if the market does.

If you’re interested in investing in property but have been discouraged by some of the recent market news, the Propiteer Capital Property Bond could be a useful solution to help you benefit from the property market without the worry of managing physical property or rising mortgage rates.

For more information about us and our bond, visit our website or get in touch with our friendly customer care team.

Rates are accurate at the date of publishing. For our latest rates, please visit our homepage.

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