Buy to let

Buying property as an investment has been very popular in the last 20 years or so. Provided you can deal with the management aspects, or employ an agent to do so, it’s been a reasonably remunerative exercise.

However, government proposals regarding mortgage interest relief are eroding the profit margins – to the extent that a recent article in the financial press suggests that a buy-to-let investor purchasing today is set to lose money within the next five years!

From 2017, the ability of landlords to deduct mortgage interest from rental income in working out their tax bill will be phased out, ceasing entirely by 2021. At the same time buy-to-let mortgage rates are set to rise over coming years.

‘Bricks and mortar’ have traditionally been regarded as a ‘fail-safe’ investment and I think it’s still true to say that, over the medium to long-term, the capital value will rise. It’s the interim fluctuations that are the problem, coupled with the ongoing return of income.

Let’s assume that a landlord borrows on average 75% of the value of the property, using a best-buy two year fixed rate mortgage at 2.54%. At the moment, he is able to deduct the full mortgage interest cost from the rental before calculating the tax due. At the present time, the statistics on average rentals in all areas indicate that there will be a profit – but it’s a slim one. London produces a notional profit of £5,000 per annum, followed by the North West at £3,150 – the lowest is the North East at £1,844.  And don’t forget, this assumes as reasonable level of occupancy and that the tenants pay the rent!  Property is not, and never has been, the easiest investment option.

By 2021, the ability to deduct mortgage interest from rentals will have been lost and the plan is to replace this with a tax credit worth 20% of mortgage interest. If we assume that the landlord is a higher rate taxpayer at 40%, and also assume that the two-year fixed rate interest came to an end and was replaced by a variable rate of 4.8%, then the calculations show that landlords will, by 2021, be breaking even in only 5 out of the 11 property regions.  If the bank rate were to rise by only 2%, making the variable interest rate 6.8%, then there would be positive returns in just one areAre buy to let properties still a viable invesntemnt?a – the North West.

Of course, you may not be a higher rate taxpayer, you might be able to remortgage at a favourable rate, and you might have tenants from heaven, not hell! Maybe – but with property purchase likely to become more expensive owing to Stamp Duty Land Tax proposals, do think about whether this is really the investment you want especially if you are not a full-time or serial investor.