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Graham Awards

TODAY'S OTHER NEWS

Are Truss and Kwarteng risking the viability of buy to let?

Rising interest rates - which may rise further and dramatically in response to the government’s tax-cutting agenda - risk eroding the profitability of buy to let for mortgaged landlords.

That’s the view of lettings agency Hamptons.  

It says that its research shows that to ensure investors stand the best chance of turning a profit, they are increasingly buying properties in higher yielding parts of the country.

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So far this year a record 73 per cent of new buy to let purchases earned gross yields above 5.0 per cent, up from 63 per cent in 2016. Almost one in four new investors earned gross yields of 8.0 per cent or above, up from one in five in 2015.

With an average gross yield of 4.9 per cent, London offers the weakest returns of any region in England and Wales according to Hamptons.  

This is one of the main reasons why London based investors are increasingly purchasing buy to lets beyond the capital, targeting higher yielding areas.  So far this year, a record two-thirds of London-based investors chose to purchase a buy-to-let property outside the capital, up from just 26% a decade ago. 

A fifth of London investors bought properties in the North of England, up from just nine per cent in 2016 and a mere one per cent a decade ago.  Here, gross yields sit at 7.4 per cent, outpacing the 6.1 per cent average across England and Wales.  

London landlords buying outside the capital bought 105.7 miles away on average – 20.9 miles or 25 per cent further than in 2016.

Today, 29 per cent of all properties in England and Wales bought as a buy to let are located in the North West, North East or Yorkshire & Humber, triple the share a decade ago. 

For the 50 per cent of landlords who use a mortgage to fund a buy to let purchase, rising interest rates mean that many will face higher outgoings when they come to re-mortgage.  This will eat into the profitability of their buy to let.

Since August 2021, the average mortgage rate on a typical 75 per cent Loan To Value buy to let has risen from 1.79 to 3.51 per cent last month. 

This means the average landlord who bought a £222,000 buy to let last year will likely see their annual interest-only mortgage payments nearly double from £3,010 to £5,903 if they re-mortgaged last month.  If last week’s 0.5 per cent base rate rise to 2.25 per cent is fully passed on, this will increase payments to £6,743 for an investor re-mortgaging this month.

As a result, the net annual profit (after costs and taxes) made by a higher-rate taxpaying investor who earns an average yield of 6.1 per cent could fall from £3,198 in August 2021 to £212 with the new base rate, down 93 per cent due to higher rates when re-mortgaging. 

If the base rate reaches 2.5 per cent, the average higher-rate taxpaying investor with a typical 75 per cent LTV mortgage is likely to start making a loss.  They will need to yield around seven per cent or more to stay out of the red – a figure only achievable on average in almost a quarter  of local authorities in England and Wales, two thirds of which are in the North of England.

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    They are risking the whole housing market 😬 Crash anyone ?

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    I don’t knock every aspect of the changes why should anyone be paying 45% income tax, it stops business expansion or individuals stopping short of their potential to keep Belinda the threshold.
    Its seems to be most of the people milking the Benefit systems are shouting to loudest about this as usual whilst contributing no tax, pay for nothing themselves.

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    Section 24 is going to be a massive problem with rising interest rates.

  • George Dawes

    Shes just following orders , they all are

  • Matthew Payne

    Too many areas to cover in a post, but this is the most chaotic, bungled, disjointed, misled budget in living memory. Respected economists all over the world and now even the IMF with its first public rebuke have all said, its the wrong thing at the wrong time, and more fundamentally the UK gov doesnt seem to understand macro economics which is the scary bit.

    Ray Dalio when talking yesterday about dumping £50bn of government debt in one go in the market followed by "there's more to come" from the Chancellor , explained that such sudden moves always panic investors, saying, "I can't understand how those who were behind this move didn't understand that. It suggests incompetence."

    We are a bit of a laughing stock, fiscal discipline is what's required, predictable safe moves to calm markets and curb inflation. We need a U turn and we cant wait until 23rd November.

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    I don't know whether the mini budget was right or wrong but I do know that doing what we have been doing for the last decade didn't really work. A U turn now presumably means the end of this Govt, another leadership contest & a general election. All effectively meaning we will have had no serious Govt for the best part of a year. The panic is caused by projections of what this MAY mean, not certainty, so I just hope everything calms down soon and we can see clearly where to go next.

     
    Matthew Payne

    I understand your point on MAY, but its all driven by confidence as well as actuals, the journey as well as the destination, and thats been pretty shambolic. On friday, Mr Kwarteng behaved like a magician at a kids party, looking to get everyone in the room to gasp, and gasp is what they did. Then he came out and said he might do some more crazy stuff next month as well!

    Even if we get to a less gloomy place on rates, they are still going to rise sharply after whats happened, costing most people dear unecessarily, but now on top, the markets dont trust us not so come out and do something else radical again, so they now price that into advance.

     
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    Both Japan and the EU have entered a balance of payments deficit this year. These governments are looking to see if the UK action, while no doubt high risk, is viable because what we see now in the gilts market is a dress rehearsal for the EUR and JPY play.

     
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    I’ve got no problem at all with abolishing 45% rate and keeping corp tax at 19%. Fully agree. The problem for me is rising interest rates whilst we have S24. That is ruinous for almost everybody, even on low borrowing like me. If they abolish it with their list of tax cuts on 28 November then I can easily carry on as normal. But if they cut other taxes and leave that one then I think we know they’re still out to ruin us and we’ll have to start evicting to sell.

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    Hi James, I am in the same boat. I do have mortgages but in relation to the value of the properties I am very well leveraged, almost at 50% now. Section 24 will mean that at a base rate of 6% and with the tax at 40% on my mortgage payments I will almost be at the point of paying tenants to live in my property. This is not right.
    Another property goes on the market next month from my dwindling portfolio.

     
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    All rental property owned by the big corporations - that is the plan. Truss & Co are part of the worldwide agenda to strip us of all our assets and control us via a social credit system and digital currency. Whether they will achieve their goals is another matter but it's already happening to us and it's picking up speed. Research is recommended, most people don't have a clue what is going on. What to do? Maybe start by destroying our mobile phones and canceling our facebook and twitter accounts....never happen.

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    Everyone seems to have forgotten about the 60% marginal rate paid on income between £100000 and £125000. That should have been tackled before abolishing the 45% rate but would have been much more expensive to the public purse. The 19% reduction is much more expensive than the 45% abolition but Labour are pretending otherwise because the 19% move is universally popular and benefits nearly everyone, Scots excluded!

    Matthew Payne

    Anecodotally the 1% income tax reduction would be welcomed by all but even the less educated in society have already worked out that a £75 reduction in tax is not worth the £300 pcm more on their mortgage or everything they buy being 10% more expensive. This is a plan for growth in more straighforward times, but not now, 2024 after the GE and after this inflationary period would have been the right time. Most people are going to be signficant losers in the short term, and as importantly market confidence in the UK has been shot to pieces, so much so the detail of what hasnt or hasnt been cut becomes irrelevant.

    Looking at property alone in context of the housing crisis we have already entered, if rates climb as high as some are prediciting, landlords will sell even faster, rents will rise, banks will repossess, not much good news to be had and difficult to wind back from once it has started.

     
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    Matthew

    I agree with your arithmetic but not with your view of the intelligence of the average tax payer or voter.

    I have replied more fully in a later post.

     
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    You are quite right. It would have been far better to reduce the 45% threshold to 100k and reinstate the personal allowance for all, though that would not have paid for it completely. But what seems to have been missed by everyone is that both of these so called tax cuts are more than wiped out by the extra tax paid due to inflation on account of the allowances still being frozen. An average earner on £30k gets 175 from the tax cut (1% of 17500) but if they get a 3% pay rise they pay an extra £171 (19% of 900). For 45% taxpayers it’s about 3.6%. Then there are all the 40% taxpayers who just get 1% of the basic rate but pay 40% on all their increase. So to stand still in real terms, you are paying way more tax. So they aren’t tax cuts at all and the reaction to them is pure hysteria driven by the left who are going to look really stupid when this penny drops.

     
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    Am I missing something? Mortgage interest is claimed back (at basic rate only, now) from the annual tax submission?

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    Agreed, so not a problem for basic rate landlords, but for landlords with high leverage they need high incomes to service their debt which in turn pushes them into high rate income tax, they only way out of that problem is to sell off some of their properties to reduce debt

     
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    Yes you are missing the fact its not 100%, so any increase is a real increase against any profits you might have been hoping for! If your mortgage goes up by £400 a month you get tax relief of only £80 so unless you can increase the rent by £320 per month you are losing money. And multiply that by say 10 properties, you are bankrupt.

     
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    Nicholas, sorry to be blunt about it, but Section 24 of the Finance Act has been debated at extreme length every day for the last 7 years. If you are a landlord, you can't have missed it. It's been phased in in increments since 2017 so you must have spotted the effects in your tax return for a few years now. Haven't you??
    Mathematically it can be challenging. As others have pointed out, high levels of leverage combined with your own personal income (gross across all income streams) can be ruinous if you're a high rate taxpayer

     
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    It is the fact that paying tax on unearned income is the problem. This is semantics as some will argue that it is earned. But paying a loan for a business has never been taxed before to my knowledge. The Government have simply stated that we are investors and not a business, unless you go Limited.
    I had hoped to have paid down my debt further prior to these fast and furious interest rate rises.
    My solution is to sell 3 properties in next 6 months, but depending on the market i am seriously thinking of selling more as I cannot see an end to this endless legislation.
    I will be happy to have one possibly 2 properties left, mortgage free to top up my pensions.

     
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    They are risking the viability of this govt and thus opening the door to the labour party, who must be delighted with all this. Tax cuts might work in some conditions but not in the current situation. Its disastrous for the majority or the electorate and either they will need to back track or they will be out.

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    I think we know the next government will be a labour government, we need to be preparing for this, get rid of any suspect tenants now while we still can

     
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    I suspect the damage is already done, they will be out at the next election, then we have Labour 😬

     
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    I'm not convinced we should be scared of a Labour government. The golden age of BTL was under a Labour government and the last 7 years of Tory policies have been a disaster for landlords. Doesn't mean I would vote for them but I have a feeling some of their more outlandish party conference soundbites will be quickly forgotten or spun to mean something completely different.

    In terms of Kwasi's tax cuts how harmful or misjudged are they really? He possibly started in the wrong place with abolishing the 45% rate. It's a big soundbite with a relatively low cost but it's usefulness in attracting and retaining talent is not immediately relevant to about 97% of the population.
    Cutting SDLT was relatively pointless as there is carnage in the mortgage market and supply side issues with both materials and labour shortages.

    The decision to leave Corporation tax at it's current rate was sensible. Should mean fewer businesses go bust.
    Scraping the NI rise was bizarre as thresholds had already been increased to encompass it.
    A significant cut to employers NI would be far more beneficial.
    Cutting 1p off the basic rate of income tax doesn't really do that much for anyone (maximum of £7.20 a week but considerably less for most people). Anyone on UC will lose most of it off their Benefit payment.
    Devising a housing benefit mortgage interest element of UC for homeowners would have been far more useful.
    Removing the cliff edges at £50000 and £100000, restoring Child Benefit and the personal allowance would have been more motivational. Proper tangible reward for effort.

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    The 45% abolition will cost around £2 billion per annum and could easily pay for itself if more high earners pay UK tax.

    The 19% move will cost around £45 billions but the Labour hypocrites don't plan to reverse that and blame the 45% abolition as the fiscally irresponsible part of the mini budget.

    I think the 19% move was a pop at the SNP who trumpet about most Scottish tax payers paying a lower rate than their English counterparts, ignoring the fact that Scottish taxpayers earning less than the English average salary pay 21% and those earning under £45k will pay the same rate as English millionaires from next April.

    With hindsight the 45% abolition was badly timed because most people are too thick to put everything in context.

    The above comment about the 19% move costing many mortgage payers more than they will save is correct but hopefully those financially astute enough to recognise this will recognise that Labour also now support the 19% move and will make far worse mistakes than any Tory Government!

     
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    When you borrow money to pay off your gas and electric bills, as Truss is doing, is completely mad!

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    The only thing I agree with her is that something had to be done. But like you Edwin, it’s the way it’s being funded. Absolute madnesses!

     
  • George Dawes

    The fact we are selling our surplus electric and gas to the highest bidder while claiming shortages and gas and electric being rationed this winter is the elephant in the room ….

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    George we have a Euro Energy system and a Euro arms manufacturing and a European army coming along shows where she is going ,! In reality you should lift as much indigenous energy as possible. There are massive reserves of coal under the North Sea and on land. It could be shipped to Europe to make up for the loss of Russian coal !

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    Jo, I have no doubt whatsoever we would now be in a better position if labour had won last Election. They couldn’t have got away with half as much injustice, using the law to apply dirty tricks. However too late now we can’t go back. It’s all about looking after the big Developers and handing the business to Banks (Barclay, Lloyds etc) John Lewis and the Big Institutions, when were they ever involved in lettings, now hand it to them, the ready made business that we strived for years to create give it to them on a platter.

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    George
    Legal and general are in the building game, manufacturing prefabs and then selling them to councils to go on old factory sites. Obviously the council will be responsible for remediation. Timber framed so they will probably last about 30 years. Since the factories are closed the occupants will be on the fole !

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    Should have said dole ! Probably full of unmarried mothers.

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    Robert, not quite everyone is forgetting at least not me.
    I commented on this other day when I said when you go over £100k they removed £1 for every £2 of your personal allowance until it all eaten up, yes is equates to over 60%.tax.

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    I never thought I would say this as a life long Conservative, but we need stability , boring old routine politics…. And that is looking like Labour. This government are a nightmare, the BOE had to step in to stop some pensions collapsing 😰😰 These are not the tories I once knew.

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    Perfectly said.....100% agreed...........

     
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    Lis Truss on the radio this morning just wanted to talk about the cap on energy prices, not sure she even realises what she and Kwarteng have done.

     
  • George Dawes

    Stop the world I wanna get off

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    I don’t blame you every organisation has their snout in the trough as far as landlords are concerned. Got letting house Insurance renewal £771. to incl’ £82 premium tax, scrap this tax people should be encouraged to Insure their property not given a penalty for it. I don’t trust them to pay out if the worst happened, even though I never had a Claim. They have more get out clauses than Houdini more Terms & Conditions added every year + more exclusions and increase premiums, good game.

  • Peter  Roberts

    My BTL portfolio was 12 properties 6 years ago now it’s down to 5.
    Of the 7 that have been sold only one has been sold to a first time landlord and and he has since sold it back to a FTB. Of all the LLs that I know and speak to, and that is several hundred, they are all selling up and investing elsewhere well away from property.
    The Government and Councils have been picking away at BTL LLs for the past few years now..
    The are making a massive rod for there own backs by reducing the PRS to the effect that they will be needing many thousands of contracts with B&Bs and cheap budget hotels to house the families that will be losing there homes due to the onrush of selling up LLs.
    The problem is Government and Councils cannot see any further than the end of there noses and don’t see exactly how much LLs have been saving them massive amounts of money by taking up the slack in the housing sector.
    I will personally never ever rent out another one of my properties and as they become empty either by tenants moving away or if necessary notice/eviction.
    Ones just gone up for sale today actually so one more less property propping up the rented sector for the Government and Council.
    BYE BYE BTL.

  • George Dawes

    Labour are just as bad , every time they get in they totally screw up the economy

    By 2030 it’ll all be over , quite literally

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    What a disaster all foreseen and avoidable as this just didn’t happen but was caused. I have been rant & raving about those Treasonable Policies long enough but Regulation’s continue in the same vain.
    Now step forward and scrap THE WHITE PAPER, Section 24 and reinstate Section 21, cut back on licensing Schemes you had plenty of Regulation’s to govern PRS already.
    OK thought not continue just sit there watch it all collapse around your ears, while everyone is suffering and now at grave risk of of loosing their homes. I suppose they’ll need PRS to re-house them.
    The BoE £60b stop gap I ask you and those people in Government Office’s and Civic Centres still in charge. This was always on the cards Liz or not.

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