Considering Investing in the London Property Market? Don’t!
You may have read that London has seen the largest capital growth in the country – this is undoubtedly true but doesn’t necessarily mean that buying property in London will deliver you the best return on your investment, let’s have a closer look at why.
1. Increased Stamp Duty
Over the last 10 years London property values have increased dramatically with average prices in Greater London now hitting a staggering £478,000 according to Land Registry; in fact, property prices in London are now 79.7% higher than they were in July 2019 – compared to say 10.2% in Newcastle Upon Tyne.
However, since the rush of buyers looking to beat the stamp duty increase that came into effect in April 2016, London property prices have now stabilised and are even falling in a number of areas with sellers happy to take offers and reduce prices. But, if you want to buy property in London, you’ll need to pay an additional 3% in stamp duty – typically a year’s worth of rental income. For example, a £275,000 Buy-to-Let purchase would require you to pay stamp duty of £12,000…compare that to just £3,750 before the tax came into effect!
2. Accessing Buy-to-Let Finance in London
As a potential property investor, the likelihood is that you only want to pay – or can only afford to pay – the minimum deposit on your investment property. With interest rates at an all time low it makes sense to spread your money as broadly as possible, enabling you to maximise the number of investments you make, with the least money down, capitalising on the availability of cheap debt (ultimately paid for by your tenants).
However, when considering a Buy-to-Let purchase you need to be mindful of Lender’s criteria (i.e. the bank’s mortgage rules and their willingness to allow you to borrow), although theoretically possible to get a Buy-to-Let mortgage with virtually no deposit, in reality you’ll need at least 25% – especially if you want to secure a better rate…however this gets even more complicated (and expensive!) because of “rental yields”.
When you purchase a Buy-to-Let property you’re doing so with the intention to generate income and build wealth, accordingly you need to ensure that the rent received covers your mortgage payments before you can make any profits; this is much more difficult to achieve in a market like London or the South East where rental yields are low and property prices are so high.
While the property values in London have grown aggressively, the rents haven’t kept pace – the end result being that yields have gone down with rental income often not high enough to cover the bank’s mortgage requirements.
In addition, banks typically look for the rental income to be 125% of the interest element of the mortgage before they’ll let you borrow for a Buy-to-Let property – but the Bank of England is taking this a step further and focing lenders to include a “stress test” by assuming borrowers pay interest at 5%.
This reduces the Loan to Value potential, restricting the amount potential investors like yourself can borrow and increases the deposit you’ll need – commonly to 40%….that’s £160,000 on a £400,000 London flat, plus stamp duty of £22,000…you’ll need to dig deep!
However, there are plenty of areas throughout the UK where you can get rental yields high enough to achieve 75% Loan to Value mortgages – London isn’t one of them though.
Finally, let’s look at affordability. Now that the investor market in London has dramatically cooled off as the government tries to help First Time Buyers purchase their own home, let’s look at the impact this has on whether you can realistically save enough to afford to buy in London.
According to the Office of National Statistics, the average salary across the UK is now £27,271, in London that figure is £39,400; when we evaluate salary versus the cost of an average property in Greater London we see that property prices are now 12x the average salary!
Lloyds bank have also published data which shows that the average first home in London costs a record-breaking £405,000 and if you’re lucky enough to earn enough to qualify for an average loan of £317,253, you’ll still need to hand over an eye-watering £90,000 deposit…oh and don’t forget the £10,250 you’ll need in stamp duty too! It’s pretty hard going saving for a deposit anywhere in the UK but even more so in a city like London where the cost of living and rental prices are already steep.
Accordingly, with so many London-based residents effectively locked out of the market due to affordability issues and without London salaries jumping significantly allowing first time buyers to access the necessary finance (or a big helping hand from the ‘bank of mum and dad’) I don’t recommend London as the best location for investing in property due to the unimpressive overall return on investment.