Property generally has long been considered a sound financial investment, so how about buy-to-let? Is becoming a landlord a worthwhile option?
Purchasing a buy-to-let property
Purchasing any type of property is a big investment and requires a substantial amount of funding, both from the investor and generally a lender, too. For a buy-to-let mortgage you are likely to have to put down at least twenty-five per cent of the purchase price as a deposit, or more to get the lowest interest rates.
When it comes to affordability, a buy-to-let mortgagee will take into account how much you can expect to make in rent. Lenders would normally look for the rent to cover the mortgage payments plus twenty-five per cent. A mortgage adviser can help when it comes to getting the best deal.
Your lender will require you to take out building insurance; it’s also good practice to insure against damage to the property by tenants, injury to tenants, and loss of income when the property is void – that’s any period when you don’t have a tenant.
Considerations for buy-to-let
Recent years have seen changes both to the property market in general and the buy-to-let market in particular.
Overall, the last few years have seen property price growth slow, and independent economic research consultancy Capital Economics predicts a slight fall in 2023 and 2024.
Changes to the tax system introduced by government have also impacted landlords. In 2016, a three per cent stamp duty supplement on second and subsequent residential properties was imposed. In 2017, tax relief for mortgage interest was restricted to the basic rate of tax. Finally, since 2019, landlords have been required to pay Capital Gains Tax on profits made from the sale of a property within thirty days of the sale being made.
Pros and cons
As with most things, there are pros and cons.
- If property prices fall, your investment reduces in value.
- The tax system changes made by the government combine to reduce profits.
- If the property is void for any length of time, you lose money (although the right insurance can help offset this).
- If you have to sell while the market is depressed, you could lose money – in a worst-case scenario, you might still owe money to the lender after the property has sold.
- You benefit from rental income – keep the property tenanted and it should pay your mortgage.
- Your property may appreciate in value over the time you own it, providing equity you can borrow against and generating profits on sale.
Steps you can take to boost profits
There are things you can do to ensure you make the most of your buy-to-let investment, including renewing your mortgage on more favourable terms when you are in a position to do so, and ensuring you operate in the most tax-efficient way possible. A financial adviser and an accountant will be able to help you here.
What’s the verdict?
Is buy-to-let a worthwhile option for investment? It’s a complicated decision rooted in an individual’s financial standing, their financial goals and their life goals.
The best way to decide whether it’s right for you is to gather as much information as you can, so you are well informed and go in with your eyes open. You can do your own research and/or seek help from a financial adviser or accountant – someone knowledgeable, who can see both sides and understands your personal situation.
It’s not something to be entered into lightly, but – if it’s the right thing for you – then despite changes to the market and the tax system, buy-to-let can still prove to be a sound investment.
If you’d like to speak to our team of experts on the above, please contact us today.