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Is the buy-to-let property market dead?

With interest rates at their highest for years, is buy-to-let property still attractive or should you invest in the stock market?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Property has long been a go-to option for people looking for a bank-beating return on their excess cash. There are around 2.82 million landlords in the UK.

But the buy-to-let market is changing – here’s how and what it could mean for you, and another option for your money.

This article isn’t personal advice. If you’re not sure if a course of action is right for you, ask for financial advice.

What are the struggles for buy-to-let landlords?

Interest rates have risen meaning landlords having to remortgage at higher rates are getting stung.

In October this year the average five-year buy-to-let mortgage rate was at 6.32%. In 2018 it was 3.4%. A dramatic increase.

And this eats into the profits landlords can make. Landlord’s percentage of profits of rental income after tax have fallen to 3.9% this year. They were around 23% from 2014 to 2021.

For some landlords, rental income might no longer cover the cost of the property. Which could force them to sell up.

But if they sell, they’re then often stung by capital gains tax (CGT).

You pay CGT on any profits made on the sale or transfer of an asset. You have an annual CGT allowance of £6,000 (2023/24), which is reducing to £3,000 next tax year.

But sell and make a profit of more than this on a second home and you’re facing CGT rates of 18% or 28% – depending on whether you’re a UK basic-rate or higher-rate taxpayer. It can be more complex for Scottish taxpayers.

And in recent years, tax and regulatory changes have hit landlords hard. These include a 3% stamp duty surcharge and mortgage tax relief cuts.

Plus, since 1 June 2019, the fees landlords and agents can charge tenants have been reduced by law (e.g. check out and admin fees). Some agents pass the full costs onto landlords.

The government is also planning to end the practice of ‘no-fault evictions’ in England by abolishing Section 21. Though its delayed, if this goes ahead landlords will need a good reason to evict tenants in the future, making it tougher when things don’t go to plan.

All giving another reason to potentially sell up.

The argument for being a landlord

People will always need a place to live. It’s a basic need we all have.

And while mortgage rates are increasing, so are average rents. Private rents in the UK rose by 5.7% in the 12 months to September 2023 – the highest increase since 2016.

The other positive is that unlike lots of other investments, mortgages give you the chance to leverage your existing wealth. You only need to cover the deposit on a property with the mortgage covering the rest. This means you only need your rent to cover your mortgage payments and maintenance costs.

Leverage can be good in rising markets, but painful when things take a turn for the worse.

How many times did we read during the financial crisis of people falling into negative equity – where the value of their property was below the amount owed on their mortgage?

Let’s not forget, you can also add value to a property. Savvy property hunters have been looking for undeveloped opportunities for years.

Could you invest in the stock market?

There’s no doubt some landlords will be questioning whether it’s worth the effort in today’s environment – especially when there are other options.

The stock market is just one alternative.

It’s a misconception that investing in the stock market is just a playground for the rich and famous. Truth is, anyone can invest in the stock market, and people from all walks of life are doing it every day. In fact, if you’ve got a pension with your employer, chances are you’re already investing in the stock market.

While many look to the growth you can get from investing in the stock market, you can also get regular income payments. The UK stock market is currently yielding close to 4%.

As with property though, yields are variable and no income is ever guaranteed.

It’s also not an all or nothing approach, you can invest while owning property too.

3 key benefits of investing in the stock market vs property

1. Tax shelters

The less tax you pay, the more money you get to keep.

You can hold investments in an ISA or pension (like a Self-Invested Personal Pension), and when held in these accounts you won’t have to pay any income or capital gains tax.

And with a pension, the government will still give you up to 45% tax relief on the amount you pay in.

When you take money out of a pension, usually up to 25% tax free with the rest taxed as income.

Pensions are meant for your retirement, so you normally can’t access your money until you’re 55 (57 from 2028). ISA, pension and tax rules can change and tax reliefs depend on your circumstances. Rates for Scottish taxpayers may differ.

2. Spreading your money

To buy property, you need lots of money upfront. It means lots of landlords might only tend to have one or two properties, and they’re often in the same area.

When you invest in the stock market you can spread your money across the globe and different industries. This reduces your exposure to only one area and how much risk you’re taking overall.

But remember that investments can fall as well as rise in value so you could get back less than you invest.

3. Get your money back quickly

If you’ve ever sold, or even bought a property, you know how long it can take.

Most investments can be sold on the day and if not, it’s not normally longer than a few days – a far cry from property.

And once it’s sold, you can either move the money into another opportunity or have it back in your account within days. This is great for keeping flexible in a busy and ever-changing lifestyle.

2 things to consider before you start investing

1. Check your current situation

Before you invest, you should make sure you:

  • Have emergency cash savings – that’s around three to six months of normal expenditure saved in cash that you can access quickly. This is to cover any unexpected emergencies – a boiler repair, or your car breaking down. This could be one to three years if you’re retired.
  • Pay off any short-term debts. These often have high interest payments, so it’s best to pay these off as quickly as possible.
  • 2. Know what your goal is

    Take the time to consider why you’re investing. And understand when you’ll want to use the money.

    For some people, it’s about growing their money and saving for the future. For others, they want their investments to give them an income in retirement. The key is not to invest money that you might need at short notice.

    You should be willing to keep your money invested for at least five years. Investing for the long term can help iron out the bumps, though there are no guarantees you could get back less than you invest. If you think you’ll need the money sooner than this, it’s probably best to keep it in cash.

How to start investing?

If you’re new to investing, here’s how to get started.

Get started

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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