According to figures published by the banking trade body UK Finance, there was a 40% increase in the number of repossessions of buy-to-let properties in the third quarter of 2019.
The figures show that 800 buy-to-let properties were repossessed, up from 570 in the same quarter of 2018.
On top of this, the number of landlords who were in severe arrears of between 7.5% and 10% of the total outstanding balance of their mortgage rose by 9%. There were 4,550 buy-to-let mortgages in arrears of 2.5% of the unpaid balance at the end of the third quarter.
These figures are quite concerning, and they confirm what analysts have been speculating for some time. The government’s recent changes to tax legislation and more stringent buy-to-let regulations are starting to hit landlords where it hurts, in the pocket.
The rising rate of repossessions also illustrates the risks of borrowing to invest in rental property. Taking out a mortgage when buying a rental property is considered standard practice, but it limits investors’ options when cash flow deteriorates. Lenders have every right to reclaim the property if you fall behind on your mortgage.
Unfortunately, I think this trend is set to continue. According to research conducted by the Residential Landlords Association, around 34% of landlords are planning to sell property over the next year due to the tax changes, which are adding to increased costs.
Considering the above, I reckon the good times are now over for buy-to-let investors, but I think investing in the stock market still holds plenty of appeal.
Time to start investing
Investing in the stock market might seem like a daunting prospect at first when compared to rental property, but it really isn’t.
Equities even have some advantages over property. For example, they are easy to buy and sell and you can invest in the market with just a few pounds, so there’s no need to borrow from a bank to fund your investment. You can also own stocks and shares in an ISA, so there are no further tax obligations to worry about.
In my opinion, a passive investment in the FTSE 100 is one of the best ways to replicate buy-to-let property due to the steady returns and blue-chip income the index provides.
The FTSE 100 is an index of the largest 100 companies listed in London today. The blue-chip index supports an average dividend yield in the region of 4.5% and has returned around 7% per annum over the past decade. You can easily track the performance of this index with a passive investment fund, with costs as low as 2% per annum.
If you are looking for a bit more risk, then the FTSE 250 could be a great alternative. The FTSE 250 is made up of smaller companies and has produced much better returns over the past 10 years (around 9% per annum), although the index is more volatile.
Still, even with this volatility, if you are not borrowing to invest, there is no risk of your investment being repossessed if you fall behind on mortgage payments.
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Rupert Hargreaves owns no share 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.
Motley Fool UK 2019