Is Buy-to-Let Still Worthwhile?

Buy-to-let remains an attractive investment vehicle for many, but it’s an ever-changing market. The key is understanding the risks and responsibilities rather than thinking of it as a sure-fire route to riches. The appeal is obvious. The respective market conditions mean rents on a property commonly exceed mortgage costs, leaving headroom for a healthy profit even after maintenance costs. Buyto-let landlords also have the potential profit from long-term house price rises if and when they sell. The rental market varies greatly between regions. In the most recent annual figures, English rents rose nearly three times as much as those in Scotland. London makes a big difference: as a rough rule over the past decade, swings in the rate of increase have been more dramatic in the city than across the country as a whole. The long-term effects of changes to work and study locations on rental markets remains uncertain. Legal changes both effective and planned may also make buy-to-let less attractive. During the pandemic renters received extra protection against eviction when falling into arrears. Meanwhile the right of landlords to end rolling tenancies (those without fixed terms) on two months’ notice may be under threat. The tax situation is also changing. From the 2020-21 tax year, landlords can no longer claim mortgage interest as a taxable expense against rental income. Instead they can claim a 20 per cent tax credit on the value of mortgage interest payments. That rate is fixed regardless of the landlord’s tax bracket, leading some higher-tax and additional-tax payers to explore setting up a limited company to buy and rent property and benefit from lower corporation tax rates. You’ll also need to take professional advice on the effects of capital gains tax if and when you sell the property. Rates and allowances are both under ongoing reviews, while the rules on what happens if you lived in the property before renting (or had a lodger) are changing. You’ll also need to pay attention to ever-increasing safety regulations. From April 2021 all electrical installations must be tested and inspected at least once every five years. None of this really matters if you can’t afford to buy a property for rental purposes in the first place. Much of the application and assessment process is the same as for getting a mortgage on your own home, though a buy-to-let mortgage is normally on an interest-only basis. Rates tend to be significantly higher than for residential mortgages, with 3 per cent a rough average at the end of 2020. You’ll need a high deposit, often at least 25 per cent of the purchase value. You’ll also need to show that the property can reasonably be expected to command a rent that’s at least 25 per cent higher than the mortgage payment. If you own more than three buy-to-let properties you’re considered a ‘portfolio landlord’ and government rules mean lenders have to apply stricter criteria to new applications. Remember also that you’ll have to pay any applicable stamp duty on each purchase (as and when the current coronavirus stamp duty holiday ends). The exemption for first-time buyers only applies when buying a property to live in yourself.