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    Sep 2003
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    Default A survivor’s guide to buy to let

    A survivor’s guide to buy to let
    With many landlords in negative equity as new-build home prices tumble, our correspondent offers some tips
    Clare Francis
    4 November 2007

    THOUSANDS of buy-to-let investors face the prospect of negative equity in the latest sign that some parts of the housing market are looking shaky.

    New-build flats in cities such as Nottingham, Birmingham and Leeds, which have been highly popular with landlords, are selling for as much as 35% less than their value just a year ago.

    Buy-to-let investors who have not built up much equity may therefore have mortgages worth more than their properties – so-called negative equity, which has not been seen in Britain since the recession of the 1990s.

    Estate agents report more landlords needing to sell because they can’t find tenants, or because interest-rate rises mean their rental income no longer covers their mortgage repayments.

    Harry Dhaliwal at Belvoir Lettings in Manchester said: “I have landlords crying on the phone to me regularly. They are being forced to sell but because so many developments are still being built, they are struggling to find buyers.”

    We offer a survival guide for landlords who are struggling.

    Don’t panic if you’re in it for the long term . . .

    While landlords who have bought new-builds are undoubtedly feeling real pain, experts said the market as a whole remains stable. House prices are expected to slow and possibly stagnate for several years, but analysts are not expecting prices to fall through the floor.

    Most landlords are sitting on significant equity because prices have risen so strongly in recent years, so even if values did fall back over the next few years, most would still make a profit.

    Advisers recommend that investors who do not need to sell should sit out any property slow-down, especially as there could be a silver lining: rental demand is expected to go up as first-time buyers who are priced out of the market opt to rent instead.

    Rents have risen by an average of 7% over the past 12 months, their strongest for 15 months, according to Paragon.

    . . . but some should sell

    Some landlords are paying more for their mortgage then they are getting in rent, following five rate rises since August 2006.

    This isn’t necessarily a problem for those with surpluses on other properties. Others are happy to cover the losses from savings because they are investing for long-term capital growth. But there are some who can’t afford to take the hit.

    Philip Stewardson at Stewardson Developments, a property company in the West Midlands, said: “If there is no way your rental income will cover your mortgage then my advice is to get out now, particularly if you bought a new-build.

    Remortgage to ” ease the pain

    Landlords coming to the end of their mortgage deals should look to remortgage to avoid a steep increase in payments.

    In 2005, Clydesdale Bank had a two-year fixed rate of 4.85%, which was popular with investors, according to John Charcol. Someone with a £150,000 inter-est-only mortgage who is coming to the end of that deal will see their payments jump from £606 a month to £969 if they move on to Clydesdale’s standard variable rate of 7.75%.

    Stroud & Swindon has a two-year fix at 6.25%, with a £944 arrangement fee. The payments on a £150,000 interest-only loan would be £786 a month.

    Watch for tougher lending

    Some buy-to-let lenders have been tightening their criteria following the credit crunch. Gmac, for example, will now only lend up to 75% of a property’s value on new-builds completed in the last two years – down from 85%.

    Investors whose property has fallen in value since they bought may no longer have enough equity to qualify for a mortgage with a different lender, although they could ask their existing lender for a better deal.

    Turn to your main home

    If you need more equity in your rental property to get a good mortgage deal but don’t have enough savings to pay off some of the mortgage, you could consider releasing money from your main home and use it to reduce the mortgage on the buy-to-let.

    Go interest only

    Buy-to-let borrowers get tax relief on their mortgage interest payments. To maximise the tax break, it is advisable to go for an interest-only rather than a repayment loan. Mortgage payments will also be lower.

    Someone borrowing £100,000 over 25 years at 6% would pay £500 a month on an interest-only basis. If they received £850 a month in rent, the tax bill would be £1,680 a year, assuming they are a higher rate taxpayer. If the borrower had a £100,000 repayment mortgage, however, the tax bill after 20 years would be £3,207 a year – £1,527 a year more.

    Defer capital-gains tax . . .

    Most buy-to-let investors will benefit from a lower rate of capital gains tax (CGT) when the rules are changed next April. If you need to sell now, you could defer paying CGT by rolling profits into an enterprise investment scheme (EIS).

    The CGT must be paid eventually, but if you sell your EIS shares over several years, using your CGT allowance each time, you may be able to avoid the tax or at least get the lower rate.

    . . . or minimise your CGT liability If you are married, it is worth transferring half of the property into your spouse’s name before you sell to use both CGT allowances. This means £18,400 of the gain will be tax-free.

    If you have lived in the property you rent out, you would not be liable for CGT for those years or for the last three years of ownership. You can also claim lettings relief worth £40,000 per owner. If you sell a property after seven years, having lived in it for three, CGT would only be paid on one year’s profits.


    CHRIS BROGAN is director of property firm Sell Quick. He owns several hundred properties but steers clear of new builds, having lost money on apartments he bought off-plan in 2003.

    Brogan, 32, from Rochdale, Greater Manchester, seen here with Melanie and their one-year-old son Finley, said: ‘All too often new builds are overvalued and overhyped.

    ‘I’ve been receiving an increasing number of inquiries from buy-to-let investors wanting to offload properties they bought off-plan but there are too many on the market to make them a viable investment.

    ‘I look for properties that I know I’m going to be able to rent out easily and where I will have an equity stake of at least 20%. In some instances I’m happy to take a loss on the rental income.’

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


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