What is happening in the Buy-To-Let-Market?
Rising interest rates, government regulation and greater tenant rights on top of harsher taxes are some of the reasons why we are seeing landlords consider selling their buy-to-let properties.
Buying second properties has traditionally been considered an attractive and popular investment, and many individuals have chosen buy-to-let investments. A buy-to-let property has the attraction of providing an income via a tenant and capital growth with a rising property market over time. Previously low interest rates have enabled individuals to raise cheap capital for a property purchase.
The attraction of purchasing and holding buy-to-let properties has however faced a headwind of pressure over the last couple of years. Higher interest rates have made it harder to raise capital and more expensive to service debts. Increased regulations and tenant rights add administration, maintenance and cost to being a landlord whilst harsher tax rules mean you can no longer offset costs including mortgage costs for tax purposes.
For people considering replacing income from a buy-to-let, corporate bonds could be a good option as they offer the potential of higher income and more capital protection when compared to equity market risk.
Forward looking yields are favourable at the moment – more so than they have been for numerous years – we’re currently looking at yields starting typically at 6% across the investment grade universe but increasing towards and in excess of 10% when you take a bit more risk.
Why investing in Corporate Bonds could be worth it now?
Corporate bonds tend to offer above-inflation returns over the medium term. Whilst this has not been achieved in the high inflationary period of the last couple of years, we now see inflation falling and forward-looking bond yields remaining high.
The administration of a corporate bond portfolio can be much simpler, and you can invest them in a tax efficient manner using ISAs and you have the flexibility to use other tax exemptions or allowances.
Bonds are debts issued by governments or corporations and have obligations to pay income, known as coupons, and have a set maturity value to pay you back your money.
Whilst their capital can fluctuate over time, if you plan to hold to maturity, you only permanently lose money if the government or company defaults on either of these obligations. This offers higher protection when compared to other asset classes.
A good fund manager should be able to ensure you are invested in solid businesses with attractive yields across a spread of investments whilst keeping default risk down to a minimum. Investing in a corporate bond fund also allows you to have exposure to different sectors and geographies, meaning you benefit from diversification.
If you opt to invest in corporate bonds:
- It is best to do it through regulated financial advice and use experienced wealth management professionals. Not all bond holdings are sensible investments and must be considered alongside your wider personal circumstances and financial goals.
- Use a wealth management professional who will be able to navigate the sector to find you the best opportunities to meet your objectives.
Corporate bonds should also be considered as part of a diversified portfolio and spreading your investments through diversification typically reduces your risk and mitigates the risk of “putting all your eggs in one basket”.
