Is Buy to Let Worth It?

One of the most compelling questions for UK real estate investors and prospective landlords is whether buy-to-let is worth it and still a feasible investment idea. This is because there have been several changes in the tax structure that have cast doubts on the viability of the buy-to-let investment scheme. In recent years, the mortgage interest relief in the country has been considerably limited.

Also, the government has introduced a surcharge on second homeowners, further casting the viability of investing in this kind of entity in doubt. For those who have been in the business, the profits have dipped. This has left many investors unsure on whether buying to let is indeed a good idea. While people are still buying property to let, the truth is this business has been significantly affected by the tax changes. So is buying to let in the UK still worthwhile? Let’s take a look. 

Changes on Buy-to-let

In recent years, there has been a slump in the growth of property prices and this has made the once-lucrative buy-to-let a riskier investment than ever. This has been precipitated by the government’s influence on the buy-to-let market following changes in the taxing system. For example, in 2016, the government introduced a 3% stamp duty surcharge that covered all forms of additional properties. Second homes fall under this category and were therefore significantly affected by the tax changes. 

The second strike by the government was on mortgage interest relief. The government has been gradually reducing mortgage interest relief ever since 2017, further complicating the situation for the already hard-done landlords by the 3% stamp duty. In the previous system, landlords were more favored as they could first deduct the interest before tax computation. This was a significant reprieve for the landlords as it guaranteed them up to 40% tax relief. Under the new system, the government offers a relief flat rate of 20% of the interest. 

These changes have undoubtedly affected landlords, especially those in the high taxpayers’ bracket. They will nonetheless be innocuous on the basic rate taxpayers. However, both stand to be affected in some way as all landlords are now required to declare all the income that has been used in shouldering the mortgage when filing for tax returns. This is in contrast to the old system when rental income was declared after deducting the mortgage repayment. With the new system, there will be an apparent rise in income amount declaration for many landlords and this is a detriment, as it means that they will be compelled to pay more tax. 

How Buy-To-Let Profits Have Changed

The profits have been affected significantly following the reduction of the mortgage tax relief. This has, especially, affected the high-rate taxpayers who have been forced to pay higher taxes than ever. Before, the 40% tax relief ensured that landlords did not have to part with a huge amount of their revenue as tax. Now with this amount having been halved, there is a significant shrinkage of the profits thus making the buy-to-let less profitable than before. 

Is Buy-To-Let Still a Worthwhile Project

The overarching question for many investors is whether buy-to-let is a reasonable investment option and the truth is there no definite answer. This is because profitability is not necessarily limited to tax. Also, it all depends on the motives of the landlord. If the aim is to quickly recoup your investment, then you’ll have to wait for some extensive period as presently, that is not viable. All in all, there are several key merits and undersides of a buy-to-let property and it is imperative to look at them before making a buying decision. They include:

Advantages of Buy-To-Let

• Landlords can still earn rental income. Depending on the area where one buys property, there is still a chance that landlords can make good returns. For instance, buy-to-let property in areas such as Leeds, Birmingham and Manchester promise returns of up to 8% which are quite lucrative.

• Landlords can still accrue capital growth as the value of the property rises over time. Even though instant returns are not guaranteed, after some time, the value of the property will undoubtedly increase.

• As a shield from income loss, landlords can take insurance cover. This will cater for loss of rental income and damage costs to the property that can lead to shrinkage of earnings.

Disadvantages of Buy-To-Let

• The tax bill will increase for the landlords. This will lead to a shrinkage in profits as more revenue will be paid as tax.

• Lack of a good insurance broker will leave landlords subjected to making less money if their property remains unoccupied. 
• Landlords have to shoulder the costs of stamp duty and insurance amongst other expenses that will eat into their income. 

For many retirees, buy-to-let is considered a feasible way of securing their future through passive earning of rental income. Nonetheless, this has happened to be a key disadvantage for many of those who use all their pension to invest in buy-to-let property. Anyone thinking of making this move should first consider the advice of Mortimers International. We are a property agency with many years of experience in the industry and have knowledgeable advisors who will be handy in assisting retirees in making the best decision.   

Are There Alternatives for Buy-To-Let?

For an investor, buy-to-let will deliver a raft of advantages such as a source of income and a potential increase in the value of the property over time. Nonetheless, there are also disadvantages that may have you thinking of considering alternative investments. For example, there is the risk of the high maintenance that is necessary for the investment. Also, it is not liquid and thus investors cannot recoup the invested money after a short while. 

These undersides may have an investor wondering if there is a viable alternative investment. There are many alternatives and among them include real estate investment funds, bonds, peer-to-peer lending and shares. Each of these investments has its respective merits and undersides and therefore it is important to critically analyze each before making a decision. 

In conclusion, property investment is a lucrative undertaking especially when you get everything right. Nonetheless, in the UK, the buy-to-let type of investment has been less profitable in the past few years following the imposition of tax and reduction of the mortgage tax relief. Nonetheless, it is still a worthwhile investment plan depending on the investor’s fundamental aim. With a property advisor such as Mortimers International, you can be assured of making a good deal out of this investment despite its waning profitability in recent years.