Does let-to-buy offer an escape from the housing market?
PUBLISHED: 10:12 08 November 2018
How will the rental sector be affected by the impact of last week's budget? Mike White, from Martin & Co in Norwich discusses.
Chancellor Hammond deliberately held the budget on a Monday, the first since 1962, to avoid, by his own admission, the headline; Hammond’s Halloween Horror.
As far as I can tell though, the only ‘horror’ is he failed to address the housing market in any meaningful way. He gave more relief to public toilets than he did to the broken housing market!
However, there was a potential stinger in there for landlords when he announced that Capital Gains Tax Relief is to be restricted but at the time of writing the detail hadn’t yet been published.
So, it looks like we’ll all have to fix the broken housing market without too much governmental support – nothing new there then.
Not too much mention neither of the other ‘B’ word in the budget which was a surprise since whatever is bad or not, quite rightly in the UK, focus is being placed firmly on the battle-worn shoulders of Brexit. And that most definitely includes the current soggy housing market - data recently released by the Land Registry shows falling transactions being the common theme throughout all the sectors reported on, and it appears there is still very little cause for optimism.
Don’t worry, this isn’t yet another interminable article about Brexit, so no need for your eyes to glaze over just yet. However, as sales of houses continue to slow and prices flatten, there is a way for those looking to sell (and can’t) to get on with their lives and move on.
When it’s a ‘buyer’s’ market, i.e. you can get your next property at a very good price without too much competition for it, the hard bit is to sell your own property to take advantage. So instead of selling, why not consider letting your current property instead? This would enable you to leverage its capital value and with the rental income, boost your borrowing potential for the new property.
This isn’t going to work for everyone but if you own a property with a decent bit of equity, its certainly worth exploring. Let me give you a fictitious example of how it would work. We’ll call our couple, Mandy and Jim, both work full time, in good jobs and have owned their flat for nine years. It’s been valued at £200,000 and they could reasonably expect to get £750 per calendar month in rent. The house they would like to buy is just four roads away from the flat. Now having small children, they need the extra space and want to stay in the same school district. ‘We love the area and have friends here. It would have been awful to lose all that because we couldn’t sell the flat,’ you could imagine the made-up Mandy saying.
Given the capital appreciation they’ve experienced in the last nine years, they have accrued a big chunk of equity and their current monthly mortgage repayments are quite modest relative to their joint incomes. By remortgaging the flat to extract as much of the equity as possible and taking the new mortgage on an ‘interest only basis’ the expected rent should more than cover the monthly repayments thereon. Enough will be left over to pay service/maintenance/insurances so that their new-found lettings business would comfortably wash its face.
Let-to-buy is not new; it dates back to the housing market crash of 1990 when many owners were in negative equity and in theory couldn’t move. But in those days’ rents were high in proportion to capital values, so some owners got enough income to secure a mortgage by letting out. Nowadays, it’s the other way around where a lot of people have decent equity in their property which can be remortgaged.
For many, let-to-buy may be a way out of the current stagnant market, which some doom and gloom merchants reckon could be with us for a good few years yet.
While I hate the tired cliché, ‘thinking outside of the box’, it does nonetheless perfectly describe what people keen to move need to do. Property is often seen as being an illiquid asset, especially in down times but I don’t believe that is true, there is usually always a solution.
If you think this could be the solution to get you moving, the Key points to note are:
Check with Martin & Co Norwich that your home is ‘lettable’
Consult with a mortgage broker to remortgage your old property to free equity for a deposit on the next home
Consider about using an agent to find and manage tenants. The cost will be tax-deductible
Ensure your old home is well-decorated and has modern equipment
Get tax advice.
Give me a call on 01603 766860 if you would like to chat the basics of this through.
Mike White can be contacted at Martin & Co Norwich on 01603 766860 or see www.martin-co.com
Martin & Co has sponsored this column.