Spend a few minutes on the Fool.co.uk website and you might come away thinking that getting into the buy-to-let market right now would be a good move. The market, says Justin Harper, is “powering ahead” with a “flood” of investors pouring in to take advantage of the many buy-to-let mortgage deals on offer. “And why not?” asks Harper, who goes on to explain that “high interest rates are actually good news for landlords”, as they price first-time buyers out of the market and force them to rent instead. Harper also manages to see the fact that the big buy-to-let lenders are relaxing their criteria and “offering more competitive deals” as a good thing.
This is, of course, all nonsense. Rising rates aren’t good for landlords. As they force up costs and reduce the odds of making capital gains, they’re generally a bad thing. And the loosening of lending criteria? This isn’t, as the bulls suggest, a reflection of the fact that banks think buy-to-let borrowers are “shrewd” and “responsible”. Far from it. It’s because they need to keep lending money to make profits and there aren’t enough potential borrowers around capable of meeting the old criteria to allow this to happen.
The fact is that right now, in most of the country, buying a buy-to-let apartment is probably a very bad idea. Landlords have been doing their best to ratchet up rents in the last year, but not fast enough to stop overall gross yields on their investments falling to “record lows”, says the FT. The typical residential property now offers a gross yield of around 5.5%. After costs, the figure comes in at around 3.5%, “far below the 6% needed to service many buy-to-let mortgages”. When house prices were rising 20% a year, that might have felt fine to most investors. But they aren’t any more: buy now and not only are you likely to lose money every month, but you might not make any capital gains when you come to sell either.
More bad news for buy-to-let investors comes from the taxman. Gordon Brown is currently working to cut down “aggressive tax avoidance” and property owners who haven’t been paying up properly are in the firing line. Officials from the Inland Revenue estimate that 80,000 people have “incorrectly assumed” that they can offset the full cost of a buy-to-let repayment mortgage against their rent for tax purposes. They can’t: only the interest portion can be offset. If you’ve got it wrong, now is the time to say so, says The Times. Coming forward voluntarily doesn’t mean you’ll be let off, but, assuming you’ve made a genuine mistake, it does make it more likely you’ll walk away “with no more than a bill for the unpaid amount and a slap on the wrist”.
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