Is My Buy-To-Let Investment Still Worth It?

More and more landlords are giving up their buy-to-let businesses because legislative pressures and rising costs mean the finances don’t stack up anymore.

Measures outlined in the Chancellor of the Exchequer Jeremy Hunt’s spring budget continue the government’s clampdown on the buy-to-let market and will force more and more landlords into selling rental properties.

A quarter of 1,500 landlords surveyed by property insurer Simply Business in their Landlord Report said they were planning to sell a property before August this year. The profit margins of buy-to-let investors have been squeezed by recent tax changes and a jump in buy-to-let mortgage rates to close to 7% last summer after a series of interest rate hikes by the Bank of England. While these might have now peaked, they remain at historically high levels.

“You are not the only one if you think your buy-to-let (BTL) portfolio doesn’t make financial sense anymore,” said Miranda Khadr, founder and CEO of award-winning financing platform, Provide Finance. “You don’t need to give up, though. With Bank of England interest-rate cuts on the horizon, buy-to-let mortgage rates are coming down. Switching to a cheaper buy-to-let mortgage might just be the thing to help your business survive. On final analysis, if rates remain relatively high, it might be worth considering pruning your portfolio. The current inflationary environment, with interest rates remaining stubbornly high, will not work for all. A return to interest rates to those seen at the start of the decade is, in the medium term, highly unlikely. In the longer term, buy-to-let landlords should be aware of rising costs, squeezing margins further, with the possibility of losses in real terms”, she added.

Let’s take a look at the current challenges facing buy-to-let landlords and what strategies could be applied to stay afloat.

Legislative hurdles, including changes to taxation, are the No. 1 pain point

According to the Landlord Report by Simply Business, two-thirds of landlords view confusing and ever-changing government rules as one of their greatest challenges.

In his spring budget last week, Hunt announced a double whammy of measures aimed at the buy-to-let market that will serve the government’s goal of increasing the housing supply available for first-time buyers by encouraging the sale of more buy-to-let properties and second homes.

Property capital gains tax cut; holiday-let tax break withdrawn

On the one hand, the government will cut the higher rate of capital gains tax for residential property gains to 24% from 28% from April 2024, which is paid on buy-to-lets, second homes and holiday lets. The basic-rate levy remains unchanged at 24%.

And on the other hand, the tax relief on holiday lets will be scrapped in April 2025. At the moment, landlords that let out a furnished home for the short term can fully deduct their mortgage interest payments from their rental income. This change will hit buy-to-let investors that have turned to the holiday let market to safeguard profitability following the withdrawal of mortgage interest relief on residential lets.

Changes in property-related taxes in recent years

The legislative backdrop has been unsupportive of the buy-to-let market for many years. In April 2016, the government added a 3% surcharge to stamp duty on additional properties, including buy-to-lets. And since April 2020, landlords aren’t allowed to deduct their mortgage payments before paying tax. The measure that had given higher-rate taxpayers a 40% tax break on their mortgage payments, was replaced by a 20% flat-rate tax credit.

Bolstered tenants’ rights on the way

Additionally, the government has proposed new rules to improve tenants’ rights, which may lead to costly mandatory upgrades to properties and make it harder to evict problematic tenants. These may be voted into law this year.

The interest rate landscape – Where are UK buy-to-let mortgage rates headed?

The other big area of challenge for buy-to-lets is financing costs surging to record highs over the past year. This is a key element in the equation when assessing the viability of a BLT portfolio.

As inflation reached a 40-year high, the Bank of England raised its benchmark interest rate to 5.25% by last August from a mere 0.1% in December 2021. This was immediately reflected in BLT mortgage rates.

Buy-to-let mortgage rates are falling but remain elevated

As the rate increases have worked to curb inflation, financial markets are now bracing themselves for rate cuts by the Bank of England that may start this summer.

Average buy-to-let rates have dropped to their lowest level since November 2022, according to Moneyfacts. An average two-year fixed rate buy-to-let mortgage across all loan-to-values is now priced at 5.51% compared with 6.88% in August 2023, the comparison website said. Equally, landlords can now get a five-year fixed rate buy-to-let loan for 4.07% compared with 6.18% in August 2023.

However, these rates remain elevated in comparison with previous years, meaning that there is a sustained squeeze on private landlord profits. At the same time, while rents have soared in the past few years, with the current costs of living crisis, there’s a limit to how far landlords are able to raise them in the future.

Buy-to-let arrears have reached concerning levels

As the costs have skyrocketed for landlords and their ability to pass this on to tenants has hit barriers, arrears on BLT mortgages are going up.

More than 40,000 BTL landlords fell into arrears on their mortgage payments in 2023, UK Finance said. In the fourth quarter alone, this number was 13,570, up 18% from the same quarter a year earlier. The number of properties with a BLT mortgage taken into possession totalled 500 during the quarter.

How to stay afloat in the current market and have a profitable buy-to-let business

It’s best practice to start by developing a strategy that aligns with your key investment goals. To successfully achieve this, here are a few areas to consider:

Understand Market Trends

Are you able to assess if there are any emerging neighbourhoods with high rental demand? What areas are showing growth? A thorough understanding of current and emerging market dynamics will set a good foundation for a more profitable and predictable buy-to-let investment. Local knowledge, based upon anecdotal feedback from, for example, local estate agents and contractors, may be invaluable in this regard.

Evaluate Your Budget

It’s important to be able to calculate your expected returns, factoring in potential expenses like property maintenance, taxes, and insurance. This will help you gauge the profitability of your investment, ensuring it’s a feasible option… and affordable.

Do you have an exit plan?

Developing a contingency plan will ensure you are prepared for unforeseen circumstances, allowing you to navigate challenges with resilience. This can also include exploring different property types and locations to minimise potential vulnerabilities.

Leverage the expertise of professionals

It’s often advised that you don’t ‘go it alone’, and rather rely on resources that are well placed to support to help ensure you’re making the right strategic decisions, including areas such as legislation, tax, or regulatory adjustments related to the buy-to-let sector. When taking all of this into account, you can navigate the buy-to-let market with greater confidence.