In the days of the 2004 to 2008 house price boom, buying buy-to-let property seemed a positive way to make some extra income.
You were owning a property which was increasing in value while your rental income was covering mortgage repayments. It seemed you were on to a winner.
Then things changed, instead of escalating, property prices first halted, then crashed, and horribly so. As a result, houses which promised a guaranteed route to a handsome profit ended up a loss-making liability.
Many landlords with buy-to-let properties felt, and continue to feel the full effect of this intense change of event. Rather than prosperous property owners, they became landlords in negative equity, saddled with all the resulting shortfalls and debts.
This is an on-going state of affairs, with many of buy-to-let landlords still wedged in negative equity, uncertain of what options are available to them.
During the boom times, buy-to-let was a much-preferred method of investment, there are over two million such owners in the UK.
Do not confuse these buy-to-let investors with ultra-rich speculators who bought up apartment after apartment in London for the purpose of renting them out for mega rent.
Many buy-to-let landlords who have suffered do not belong in that category; instead, they’re ordinary middle-class people who chose to buy property for their children, who were, or still are studying at university.
At the time it appeared to be a win-win deal – parents owned the property, which then served as a home for their children who, in turn, paid rent to live in it.
It seemed to be an outstanding investment all round, a complete money-making savings plan, which as well as being set up to provide a nest-egg, offered the opportunity of providing immediate accommodation for their children and in many cases, for their fellow-students too.
Other buy-to-let landlords invested in property to let out to tenants who required rented accommodation. Today, many of those landlords own homes with negative equity.
Negative equity is not the only problem for landlords at present, as a new move by Chancellor George Osborne is certain to add to their gloom. He has proposed a new tax to be applied at a rate of more than 100% of the investors’ return.
Richard Dyson of The Daily Telegraph said “Buy-to-let was a part of their savings plan. But it will soon be untenable. It won’t be among their investment choices. Mr Osborne has killed it. We now have people paying tax on zero income. We now have a tax regime that appears not to be able to distinguish between revenue and profit. It is a tax from Alice In Wonderland, a truly bonkers tax, a tax you would laugh at if it were being applied in a Third World country by a lunatic dictator.”
However, buy-to-let remains prevalent, even though interest charges on the repayments of buy-to-let mortgages are usually higher, as well as the deposit required. Mortgages tend to be interest-only too, which begs the question of how the capital is to be repaid at the end of the loan period.
Despite these complications, there still remains a buy-to-let ethos. As a result of reforms to pension regulations that took effect in April 2015, people from the age of 55 now have access to their retirement funds and some are selecting to invest in buy-to-let property. Hopefully, they will have pursued reliable and independent financial advice before doing so.
One can only be optimistic that they dodge joining the ranks of landlords in negative equity and that, as buy-to-let landlords, they do not become victims of George Osborne’s shunned ‘Alice In Wonderland‘ tax.
Fact: if landlords bought a property between 2005 and 2008, there is the strong likelihood that they are in negative equity, which is not helped by the unrealistically high house prices of that period, along with reckless lending from the banks and building societies.
Buy-to-let landlords have paid, are paying and will continue to pay a hefty price for some of what has gone on.
If you are a landlord with properties in negative equity, get in touch with a member of the Landlord Debt Advisory team today for advice.