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How secure are buy-to-let property investments?

Reading Time: 6 Mins Read

A buy to let investment could be a very attractive proposition if you are seeking regular income or capital growth. Low interest rates mean that your savings may not be yielding a satisfactory return, putting property investment firmly on your radar. But how secure is a buy-to-let property investment and would it deliver the financial returns you are looking for?

Recent changes to taxation have had an impact both on the affordability of buy-to-let mortgages and on the financial benefits that you could enjoy from your investment. It is also important to note that the regulations affecting private landlords have become increasingly stringent and that Brexit is causing uncertainty in the property market.

But before you rush into buying a property, or dismiss the idea out of hand, you should consider whether a buy-to-rent still makes sense for you. The situation is complicated, and what could be an incredible investment for one person might deliver disappointing returns for another.

Is buy to let still worth it UK


Tax and buy-to-let properties

When you purchase a property in England, which is not your primary home, you will have to pay an extra 3% on top of each stamp duty band. In Wales, Land Transaction Tax (LTT) on additional properties is even more penal and in Scotland, Land and Buildings Transaction Tax (LBTT) varies from 4% to a lofty 16%. Stamp duty is certainly a consideration when evaluating the affordability of your investment and could at least dictate where you choose to buy.

Most investors in buy-to-let properties will also need to pay income tax on the rental payments that they receive. Until the 2016/17 tax year, buy-to-let landlords were able to deduct mortgage interest and certain other costs from their rental income before calculating their tax liability. However, from 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax.

Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income. The change means that your taxable income, and therefore your tax bill, will rise. It will affect you more if you are a higher rate tax payer or if the rental income you receive pushes you into the higher rate bracket.

When you come to sell your property investment, you will need to pay capital gains tax on any profit that you make above your capital gains tax allowance.


Buy-to-let mortgages

You can invest in a buy-to-let property, even if you don’t have the capital to cover the entire purchase price. Many lenders offer buy-to-let mortgages and most types of mortgage are available including fixed, variable, tracker, discount or capped interest rate products. The majority of buy to let mortgages are interest only. This is because repayment mortgages involve higher payments, which may not be covered by the rental yield.

With an interest only mortgage, your monthly repayments will only cover the interest owed – the amount you borrowed is not reduced by your payments. You would have to sell the property to repay the loan or find an alternative way of accumulating enough capital to cover it.

It is possible to obtain a buy-to-let mortgage if you are a first-time buyer but you might have to demonstrate a higher ratio of rental income to mortgage payments than an experienced landlord or provide a larger deposit.

Buy-to-let mortgages generally have higher interest rates than normal residential mortgages and may also attract higher fees. You should research the available mortgage products online or use a mortgage broker to find the most affordable and appropriate mortgage deal for your needs before you begin viewing properties.


Risk and reward – doing the maths

Property values will always be subject to fluctuation but would be expected to rise over the longer term. With the current uncertainty caused by Brexit, it is particularly crucial that you do not view a buy-to-let property as a short-term investment.

It might be several years before you enjoy significant capital growth. On the other hand, you could be fortunate and make an impressive profit relatively quickly. Any fall in property prices might see you sustain capital losses or in negative equity.

You potential issues don’t end with the state of the market. Rental properties may be subject to void periods during which they are not occupied and therefore yielding no rental income. When assessing whether a buy-to-let is the right investment, you must calculate whether you can afford to cover the mortgage payment at times when you do not have a tenant or if your tenant fails to pay their rent.

You should assess whether or not the rental income you can achieve will cover ongoing maintenance, administrative and insurance costs in addition to your mortgage payments. There are regulations, which limit the rent you can charge; you cannot simply settle on whatever you need to cover your outgoings. In view of the many costs involved, therefore, it may not be possible, to generate income from your property unless you are a cash buyer.

Most tenants will treat your property with respect and won’t cause you serious problems but you could be unlucky. Tenants may damage your property, fail to pay the rent or refuse to leave when you give them notice. You might have to pay for significant repairs, legal fees and court fees.


Buy-to-let investments – conclusions

You should only invest in a buy-to-let property if you can afford to live without the rental income that it may provide and if you don’t require capital growth in the short term. If you can comfortably afford the mortgage payments, with or without the rental income, and you buy wisely, your investment could eventually yield impressive capital growth and deliver useful monthly income over a period of years.

At Assetgrove, we can reduce the risks associated with buy-to-lets by helping you every step of the way. Our property management services reduce the burden on your time and we are able to provide guaranteed rent for up to five years.

Find out more about our rent guarantee scheme or call 020 8886 4944 today.

Neil Jennings

Neil is the Operations Director at Assetgrove Lettings, London's Leading Rent Guarantee Company, providing Landlords with no voids, property maintenance, fee-free property management and stress-free service.

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