Buy to let: what you need to know
- 14 October 2019
- 5 mins
Buy-to-let property has become increasingly popular as an investment in recent years. Investing in property offers the potential for a regular income stream from rents, accompanied by capital growth resulting from increases in the property’s value.
Buy-to-let: why do people invest?
The performance of property sector tends to move independently of equity or bond markets; therefore, exposure to property can help to diversify an investment portfolio. However, the fortunes of the property sector are closely bound with those of the domestic economy: when the economy is doing well, demand for property rises; when the economy is in decline, the property sector suffers.
You can offset your costs against tax, including interest on your buy-to-let mortgage repayments, letting agents’ fees, advertising and repair costs. You can also claim tax relief on certain renovations and repairs as they occur, but this does not cover improvements to the property. Looking ahead, higher and additional rates of tax relief are being phased out and replaced by a 20% allowance for all landlords by April 2020. If you sell your buy-to-let property for a profit, you will be liable to pay capital gains tax, although some capital investments can be set against your gains.
Tax treatment depends on individual circumstances and is subject to change.
Buy-to-let: what are the risks?
Property requires upkeep and rents are not guaranteed, so if your property is sitting empty, you will have to pay the mortgage from your own pocket. Moreover, property can take time to sell, so it’s not ideal if you require cash in a hurry – and if you sell your property at a loss, you will have to make up any shortfall when paying off the mortgage.
A buy-to-let mortgage requires a much higher deposit than when you buy your own home – up to 40% of the value of the property. Lenders may demand a rental income of around 125% of your monthly mortgage repayments, and you can also expect to pay higher interest rates to compensate the lender for the additional risk.
Meanwhile, the government has been taking steps to reduce the attractions of buy-to-let property investments by reducing your scope to offset your borrowing costs against your rental income, and by shifting responsibility for some of the costs associated with setting up a new rental agreement from the renter to the landlord.
A buy-to-let property is different from owning your own home – you’re effectively running a small business. It represents a substantial responsibility with legal and tax ramifications; it’s also a financial commitment that can involve unexpected expenses. Moreover, buying an investment property may leave you very exposed to the UK domestic property market when added to the value of your own home. Therefore, you should always consider a buy-to-let property in the context of your total investment portfolio.
Lending is subject to an assessment of your circumstances. Overdrafts are subject to status and application and repayable in full on demand.
YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Any views expressed are our in-house views as at the time of publishing.
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