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Are buy-to-let mortgages worth it?

Are buy-to-let mortgages worth it?
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For decades, low rates on buy-to-let mortgages, increasing property values and high rents created the perfect environment for making big returns as a landlord.

However, recent tax changes have made it trickier to turn a profit, causing potential landlords to question whether it’s worth investing in.

Here, we explain how buy-to-let mortgages work and whether you can still make a return.

What is a buy-to-let mortgage?

Buy-to-let mortgages are designed for people who wish to buy a property to rent it out, rather than live in it.

They differ from standard residential mortgages, which should only be used to buy a property that you wish to occupy.

Buy-to-let mortgages tend to have higher fees due to the increased risk landlords pose to lenders.

How do buy-to-let mortgages work?

Buy-to-let mortgages require a minimum deposit of 20%-25% of the total value of the property you want to buy.

As a general rule of thumb, larger deposits allow you to get better rates. Some of the best buy-to-let mortgage deals are often reserved for investors with deposits of 40% or higher.

In addition to the deposit, you’ll have to pay charges, such as arrangement fees, which can be as high as 3.5% of the property’s value.

You’ll also have to cover stamp duty, a tax you pay on property purchases, of 3% on homes above £40,000.

Most buy-to-let mortgages are interest-only, which means that they must be paid in full at the end of the mortgage term. Most landlords do this by selling the property.

Who can get a buy-to-let mortgage?

To be eligible for a buy-to-let mortgage you’ll need to meet certain requirements.

These include having a minimum annual salary of £25,000 and owning a home outright or with an existing mortgage.

Check out our qualifications for getting a buy-to-let mortgage guide to find out if you’re eligible.

How do you make money from buy-to-let?

Once you own a buy-to-let property, you can turn a profit in one of two ways.

The first is through rental yields, which you’ll earn from the rent your tenants pay, minus any maintenance and running costs.

The other is through capital growth, which is the profit you earn if you sell your property for more than you paid for it.

Is buy-to-let still worth it?

Overall, buy-to-let mortgages can still offer good long-term investment opportunities.

The number of private tenants in the UK increased 63% between 2007 and 2017, according to data from the Office for National Statistics. This figure is expected to grow as the UK population increases.

On average, UK house prices are continuing to rise, meaning that there are prospects for capital growth. Rents across the UK are also still rising above the rate of inflation.

Before taking the plunge, however, it’s really important to be prepared for the financial cost of being a landlord, which has increased over the years due to tax changes.

In 2016 a 3% stamp duty charge for anyone buying an additional property over £40,000 was introduced, which adds an immediate premium to home purchases.

Previously, landlords could deduct 10% in tax relief for the cost of fixing wear and tear in buy-to-let properties but this has now been scrapped. This means you’ll need to be prepared to cover maintenance costs in full, such as a boiler replacement, which can be up to £4,000.

From April 2020, tax relief on interest from buy-to-let mortgages and other allowable costs was restricted to 20%, which is the basic rate of income tax. This increases the tax bill for higher rate and additional rate taxpayers.

In addition to the tax implications, you’ll also need to be prepared for unexpected incidents such as loss of rent, which will directly affect your income.

There are insurance products that offer coverage for situations like this. Check our guide to find out if taking out a policy could help you save money in the long run.

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