Navigating the Regulatory Minefield of Buy-to-Let: What Investors Need to Know in 2023
The Buy-to-Let market has long been a popular investment choice for those looking for a steady income stream. However, as regulations continue to tighten, many experts are predicting the death of buy-to-let as we know it.
So, what does this mean for those already in the market, and what should potential investors consider before jumping in?
The reality of buy-to-let in 2023 is a regulatory minefield, and investors need to be aware of the various lender rules, fees and deposits, HMO licensing, and taxation regulations.
All mortgage lenders have different lending criteria, but most buy-to-let mortgages require a deposit of at least 20-25%, and around 40% to secure the best rates. It is important to meet your lender’s affordability rules and interest cover ratios, and navigate any lender limits on the number of properties in your portfolio.
Since 2019, landlords and letting agents have been prohibited from charging tenants certain fees, and there are now caps on the amount of deposit or holding deposit money landlords can take from tenants.
Landlords can only charge tenants rent, a refundable security deposit, a refundable holding deposit, a default fee for lost keys or late payment of rent, or a fee for requesting changes to a tenancy agreement during the fixed term.
Landlords who rent out Houses in Multiple Occupation (HMOs) may require a licence to legally let their properties out. HMO licensing is mandatory for properties with five or more tenants from more than one household, known as “large” HMOs. Smaller HMOs rented by fewer than five tenants may not require a licence.
However, many local authorities operate additional licensing processes, meaning all HMOs in their area require a licence, regardless of size.
Taxation is one of the most complex rules around buy-to-let property, and landlords need to be aware of regulations around stamp duty, income tax, capital gains tax, and deductions of mortgage interest. Landlords and those buying second homes must pay a 3% stamp duty surcharge on each property they buy.
If you make a profit from renting out a property, or properties, you may have to pay income tax on that profit. It is possible to deduct certain costs from your rental income, such as water, gas, electricity, and council tax (if you pay them rather than the tenant), insurance costs, costs of services, letting agent management fees, accountancy fees, ground rent and service charges for leasehold properties, maintenance and repair costs, and replacement relief on items such as furniture, carpets, appliances and technology.
With all these regulations, it is no surprise that some experts are predicting the death of buy-to-let. In 2023, Lewis Shaw, Riverside Mortgages, advised that if he were holding a buy-to-let mortgage above 60% LTV, he would be selling up and looking to do a deal faster than a Tory peer with a dodgy PPE contract.
Potential investors need to be aware of the regulatory environment and do their due diligence before making any decisions.
In conclusion, while the death of buy-to-let may not be imminent, the regulatory environment has become more complex, and investors need to be aware of the various rules, fees, and taxes. Potential investors should take the time to research the market and understand the risks before jumping in. Property development now looks a much more secure and higher yielding option.