General guide to investing in UK Property

These guides are are intended to give property investors some thought provoking information and calculation charts to encourage them to properly research their intentions and lead them into making better informed decisions about their investments.

Background to property investment for the rental market

Within living memory UK property values have steadily increased ahead of inflation giving those people who invested in property a great return on their investment. Since around 1996 people began to seriously invest in property to for the rental market and as lenders supported the trend with cheap mortgage products the opportunities became irresistible. The property investment market known as the buy-to-let (BTL) market was born.

The current market for property investment

In 2015, the then chancellor of the exchequer George Osborne introduced a series of tax changes which were intended to slow the growth in buy to let property ownership. Some of these tax changes were:

  • Stamp duty – Stamp duty is a tiered tax that has to be paid on the purchase of any property in the UK. What happened was the rates of stamp duty on second property purchases was raised by 3 percent on each band rate. This additional stamp duty charge applies to every additional property purchased in addition to the residential family home.
  • Mortgage interest – Before this, investors could hold portfolios of rental properties and offset certain costs such as mortgage interest, against tax.

Added to this lenders came under pressure from the financial conduct authority (FCA) to tighten their lending criteria which meant that buy-to-let mortgages became much more difficult to obtain. Below are some of the criteria that was affected.

  • Rent to mortgage repayment ratios – Lenders now apply a nominal factors when calculating if a loan matches the anticipated rental for the property. To explain this, assume that the true interest rate on a loan is 3.5 percent and previously the rent to mortgage payment ratio factor was 1.25, today lenders will use arbitrary factors of say interest rate 5.5 percent and loan mortgage ratio of 1.45. An example based on a loan of £100,000 is shown below.

Previous calculation Todays calculation

Monthly mortgage payments £291.66 £458.33

Factor 1.25 1.45

Rental income required from property £364.57 £664.57

This means that investors must exercise care when purchasing an investment property if they require financing.

  • Interest only mortgages – These were previously the norm for investors and kept the monthly mortgage payments low but although these types of mortgages are still available for investment properties they have been restricted and lenders are now pushing towards repayment mortgages. Together with the tax changes mentioned, an investors ability to achieve a self-funding position on rental income has been made more difficult.
  • Affordability – Previously lenders would simply offer finance on the basis of the amount of rental income the property could achieve. Today they may want evidence that the investor is capable of keeping up the payments on the loan during void periods.

 

No two lenders will apply the same criteria so the prudent property investor will engage with an experience mortgage adviser to guide them and obtain the best finance terms available.

Looking to the future

According to a recent survey published by the Royal Institution of Chartered Surveyors (RICS), the UK is facing a critical shortage of rental property. The report indicates that by 2025 rental demand will increase by 1.8 million households.

Against this background and the current failure of successive governments to increase housebuilding, it would appear reasonable to assume that property values and rental yields will continue to rise for the foreseeable future.

The property investor of tomorrow

Property investment may now follow other forms of investment where the successful investor will be the one who properly studies the market and understands his or her reasons for making their investment. Some things to consider are:

  • Reason for buying an investment property – Defined your reasons for purchasing investment property and ensure you purchase the right type of property in the right location to give you the outcome you want to achieve.
  • Property location – The location you choose will ultimately define its growth in value over time. Just look at how London properties have escalated over the years to see what we mean.
  • Property type – Most locals will hold a good range of property types. Making the choice will depend on certain key requirements such as the type of tenant you want to attract, your ability and availability to carry out maintenance work on the property or the skills you have to plan and execute renovation projects.
  • Tenants – Once you know the type of tenant you want to attract you will need to check that that the area you have chosen is attractive to that type of tenant.
  • Taxation – Assuming you are registered to pay UK tax, an early consideration will be how the proceeds of this investment will sit with your current income position with particular regard to basic rate and higher rate tax thresholds.

 

Footnote: This guide touches only briefly on the general areas that property investors need to consider. Reading the other guides we have and referring to the various calculators we have provided should give the tools and information you will need to help you research and understand the things that will help you attain your intended goal.

At investment-property.co.uk we wish you every success with your investments and if we can assist you in any way, please get in touch.