What does recession mean for Buy to Let investors?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
With GDP figures showing a 0.3% shrinkage for April 2022, many analysts are concerned that the UK is now entering a recession (following a decline of 0.1% in March). Although a “full blown” recession seems unlikely at this point, there are signs that the economy is entering hard times. The property market appears at a turning point – with sellers slashing prices by as much as 20% in some areas – and interest rates are rising, putting pressure on mortgage repayments.
Given this situation, what are the implications for property investors – particularly those in Buy to Let (BTL)? In this article, our financial planners here at Castlegate in Grantham, Lincolnshire offer some thoughts. We hope you find this content helpful. To discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
The changing BTL market
Buy To Let (BTL) investing has already been increasingly difficult in recent years due to more strict tax rules. For instance, it used to be the case that you could sell multiple BTL properties, move overseas for five years and have your gains exempt from capital gains tax (CGT). Wear and tear allowance could be claimed up to 10% of annual rental income, and stamp duty was not applied on BTL properties under £150,000.
There was also full mortgage interest relief. This allowed you to deduct mortgage expenses from your rental income, reducing your tax bill. However, since April 2020 this is no longer the case. Now, you can receive a tax credit equivalent to 20% of your mortgage interest payments; far less generous than the 40% effective tax relief that Higher Rate taxpayers initially received. For some landlords, this has added £1,000s to their annual tax bill.
Despite this, the picture is still mixed in June 2022 about whether landlords are entering or leaving the BTL sector. Clearly, many are still drawn to the idea of investing in bricks and mortar. Yet with the UK potentially entering a recession, how could landlords protect themselves?
BTL and possible recession
A UK recession is not certain, and if it transpires in the coming months there is no telling how severe it might be – or how long it could last. It is also not possible to predict the exact impact upon the housing market. However, historically recessions do tend to pull down valuations. Naturally, this would be bad news for many existing landlords who might be looking to sell, as gains would be eroded by lower selling prices.
However, this is not a blanket statement. Popular locations are likely to be less impacted by a recession due to continuing demand. Less desirable areas would plausibly be hit much harder. Moreover, a recession is not always bad news for those with property. Consider the 2008-9 Great Recession; the most devastating recession since World War Two. Here, many UK homeowners ended up benefiting as their mortgage payments fell (e.g. due to the falling base rate) – leaving more disposable income in their hands.
Should I invest in BTL right now?
This question very much hinges on your personal financial goals and situation. For instance, how stable are your financial affairs right now? If you have limited emergency savings (e.g. 3-6 months’ worth of living costs) then it may be wiser to focus on building up a “rainy day” fund before saving for a BTL deposit.
It is also worth considering your job security. Recessions tend to accompany a rise in UK unemployment, and those with part-time or casual contracts usually have lower priority to remain in their post during hard times (as seen during the COVID-19 pandemic). Sole traders may also face a lowering of income during a recession as consumers save more to tide them over during hard times.
Remember, Buy To Let can be profitable for many people. However, it differs from many other investments (e.g. shares) in that it can end up costing you money each month – not just losing value on a spreadsheet. For instance, suppose your tenants move out and you are left covering the mortgage (on top of your own) for several months. This could put huge financial strain on many people. Bear in mind that BTL investments also come with a liquidity risk. They can be hard to sell quickly, especially during a recession when many others will likely be looking to sell – putting downward pressure on valuations.
As a general guide, therefore, those with more wealth and income to spare are likely to find BTL plausible as an investment at the present time (e.g. you can cover the BTL mortgage easily by yourself if you could not find tenants for a season). However, there are no universal rules and so it may be worthwhile discussing your investment plan with an experienced financial adviser. This allows you to effectively survey a wide range of options and build a strong portfolio based on the best available information.
Conclusion & invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
