Following an analysis of the market, Private Finance believes that although buy to let remains an attractive investment in the immediate future, it also warned that accessing finance will now be the biggest challenge for amateur landlords in the new market landscape.
Private Finance’s analysis takes several key factors into account including the reduction in higher rate tax relief, the stamp duty increase and the outlook for house prices and yields. The broker has also considered the impact of the European Mortgage Credit Derivative (MCD) and concluded that whilst these factors may have a negative impact, they are unlikely to dampen the market altogether.
Private Finance has applied its model to a typical buy to let situation in a typical commuter town. Its findings demonstrate that a potential 62% return on capital could be achievable, if the investment is held for a term of at least five years utilising a fixed rate mortgage at 3.6% for the duration which is currently available in today’s market.
Whilst a number of commentators have suggested that annual capital appreciation of as much as 5% is achievable in areas such as this, Simon Checkley, Managing Director of Private Finance has said that a buy to let still remains viable at a lower rate of appreciation.
Checkley says:"Of course, these figures assume the full extent of the tax relief reduction and stamp duty hike so the short term returns could look more attractive if you are able to take immediate action and complete a purchase before 1 April 2016 when the increased stamp duty will apply.
We are not underestimating the impact of the loss of higher rate tax relief or the increase in stamp duty on the market. What we are saying is that they are not necessarily 'deal breakers'. Of course, there have been many protestations in recent weeks from concerned landlords as a result of the planned tax changes. What is less commonly recognised is that there are still opportunities in this market if an investor makes a sound purchase subject to other underlying economic factors.
Understandably, many landlords are claiming they will lose considerable sums of money as a result of these changes. However this does beg the question of the true viability of their original investment.’
Checkley added: "With regards to house prices versus yields, it can be difficult to make things work in London because house prices are such that yields remain relatively low. This obviously affects the amount of mortgage you can obtain and therefore the attractiveness of buy to let as a whole. However, a number of commuter towns by contrast are offering both the potential for capital growth as well as decent yields."