2022 was not the easiest year for many property investors. Not only is inflation driving up many costs for landlords (e.g. maintenance costs), but rising interest rates have also pushed up rates on new buy to let mortgages. Ignoring the moral dilemma, landlords have often found it difficult to raise rents to try and compensate for rising costs. The rising cost of living in the UK is creating an effective “cap” on how much tenants can afford to pay on housing, with many already falling behind on their bills. Looking ahead into 2023, how viable is buy to let as an investment? Should landlords get out of the sector and focus on other assets instead? Below, our Carlisle financial advisers offer some thoughts to assist property investors.
Employment, recession and property prices
As we start the year in 2023, one positive tailwind behind the UK property sector is that the country still has a low unemployment rate (3.6%, which is 0.2 percentage points lower than the previous three-month period). Despite assessments of an imminent (or even current) recession, forecasts do not widely expect the labour market to loosen dramatically this year. More people in work is generally good for landlords, as tenants continue to receive a salary to pay their rent. With this said, average property prices are expected to fall between 5% and 12% in 2023. This could be an issue for current landlords looking to sell, as they may need to lower asking prices. However, prospective buy to let investors may be able to get on the property ladder sooner if lower property prices translate into smaller mortgage deposits.
Tax changes and interest rates
On 6 April 2023, the Annual Exempt Amount will go down from £12,300 to £6,000 per year. This means that a buy to let investor could see up to an additional £6,300 of capital gains subject to tax in the 2023-24 tax year when selling a property. The changes could lead many landlords to rush to exit the sector, and may even be contributing to the downward pressure on house prices in 2023. Another pressure, however, is interest rates – which have steadily increased over 2022 as lenders follow the rising Bank Rate. Many landlords are on a fixed-rate mortgage, but these will eventually expire. If the renewal date comes later in 2023, many landlords could face higher mortgage costs from deals offered by lenders.
The impact of regulation
Buy to let investing has, arguably, been increasingly “suffocated” in recent years by more strict regulations. Tax relief on mortgage interest ended in April 2020, leading some landlords to face higher tax bills in the £1,000s. Currently, the government (under its net zero drive) is proposing that all rental properties will need an EPC rating of ‘C’ or above by 2025 for new tenancies and 2028 for every existing tenancy. This could lead to losses for landlords who need to upgrade non-compliant buildings or if a property cannot be rented out.
Is buy to let worth it in 2023?
Certainly, the above paints a negative picture of the buy to let sector. Yet harsh conditions can also create opportunities. For instance, a highly desirable property could become available at a “bargain” price from another investor looking to exit the market. With buy to let investing, it is a good idea to stress-test prospective properties to increase your chances of maintaining a profit throughout the lifetime of an investment. For example, perhaps you could turn a profit based on current interest rates – but what if they went even higher (as many analysts expect for 2023)? Could the property still plausibly retain profitability if regulations and tax rules tighten even further?
As a general rule, the less you need to borrow for a buy to let mortgage, the more viable buy to let is likely to be as an investment. This leaves you less vulnerable to interest rates and policy changes that could undermine your profits, since your outgoings are lower and you can keep more of the rental income for yourself. However, this is likely to require a larger up-front investment which you may (or may not) have. If you do possess the capital, it is also worth considering your diversification risk. Would committing the capital lead you to concentrate too much wealth into one investment (a buy to let)? Remember, there is still a chance that your property may not sell for as much as you bought it for. There could also be periods of tenant non-occupancy, leading to a loss in monthly rental income. In which case, you would be forced to cover costs yourself (e.g. the buy to let mortgage, storage or letting agent fees).
Weighing these factors can be complex. Working with a financial planner can help you address the risks involved with buy to let investing, enabling you to mitigate risks and build maximum protection into your investment strategy and overall financial plan.
Invitation
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This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.