Is it time for buy-to-let landlords to throw in the towel and liquidate their property assets? I don’t know, but I can’t find a bullish voice on The Motley Fool regarding buy-to-let in 2019.
One positive is that buy-to-let mortgages are still cheap compared to historical norms. It’s all because of the extraordinarily low base interest rates we’ve seen since the credit-crunch last decade. But I can’t help worrying that with interest rates having been so low for so long, there must be a great deal of pressure building to the upside.
Beware of the temptation of cheap mortgages
Indeed, the UK economy could flourish in the years to come and interest rates could rise in an attempt to tame the beast and keep inflation under control. I wouldn’t want to be on the wrong end of a mortgage with a variable interest rate if that happens, especially if I’m maxed-out to the tune of hundreds of thousands of pounds with my mortgage borrowings.
But oh, how those mortgage companies will tempt you with their low rates and special deals now. If those interest rates rise in the years to come, taking out a buy-to-let mortgage in 2019 could end up being the biggest investing misstep you made.
On top of that, the property market stalled in 2018, and falling property prices could be a trend that continues, especially if ‘affordability’ is to catch up with runaway prices. So, you could take on buy-to-let property this year and finance it with a mortgage only to find yourself in negative equity down the road. Rental yields will have to work hard to fill that hole in your total returns, and the process of getting back to breakeven could take years.
Be wary of gearing up your investment
When property prices were rising, the geared investment that you get by investing borrowed mortgage money juices up your returns. But it works the other way, too. If property prices slide, your overall losses can rapidly build up. Imagine a scenario where the mortgage rate has risen with the effect of increasing your mortgage repayments, and the property value has plummeted to put your investment deeply in the red. That would be a grim position to find yourself in.
On top of all that, the government’s tax regime surrounding buy-to-let has changed and remains in a state of flux. The net outcome is that the government gets more in tax from your buy-to-let enterprise than it did before. Landlords are being hit by a reduction in mortgage interest tax relief that is set to crank up further from here. There’s also a change in the law regarding how costs can be passed on to tenants via letting agents, which looks set to be another blow to profitability for buy-to-let landlords.
It seems to me that the tide is against buy-to-let. I reckon it could be risky to take on a geared investment in the property sector during 2019. Instead, I believe a more attractive investment opportunity exists in shares for 2019, especially after the recent stock market pullback. The following links lead you to some great ones.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.