Investing in a Buy-to-Let Property

As with any investment, it’s important to remember that the value of your property can go down as well as up – something that’s easy to forget following a sustained period of growth. To show just how real that risk is, we only need to look back to the 2007-08 financial crisis, when the average house price fell 14.7% within just one year. Could you cope with that level of loss?

Property prices are very much reliant on what’s happening in the broader economy and demand in the local area. And unlike other assets, they can take time to sell, especially in a falling market or with contracted tenants in place.

As with any investment, you should be prepared to commit for the long term. Property is considered an illiquid investment, meaning that the money you’ve invested will likely be tied up for a considerable time. So, before you invest, you need to recognise that you won’t be able to access that money quickly – selling a property requires time and effort.

Property also tends to be an ‘all or nothing’ investment. So, unlike other asset classes, you won’t be able to sell a proportion of a property should you need to raise funds or rebalance your assets.

A ‘buy-to-let’ will likely be an additional property to your main residence. Therefore, when purchasing it, you’ll have to pay a stamp duty surcharge of 3% in the UK (on top of the normal stamp duty tax) and an additional 4% in Scotland and Wales.

When you decide to sell, you’ll also be subject to capital gains tax, depending on your circumstances and how much profit you make.

The government has also clamped down on ‘mortgage interest relief’ in recent years, which has eaten into the income landlords receive from rent. Until 2017, landlords were allowed to deduct the interest they pay on their mortgage before tax, which could be as much as 40% for higher-rate taxpayers. But this tax relief is no longer on offer, and it’s hit many landlords hard, especially those with ‘buy-to-let’ mortgages.

As a landlord, you’re responsible for maintaining the property, so you need to ensure the monthly income is sufficient to cover any costs. You’ll also need to be sure you can cover your costs if the property was left unoccupied for any length of time or your tenant defaults on their rent.

If you don’t have the money to buy a property outright, you’ll need a buy-to-let mortgage instead of a standard mortgage. Your lender will typically require at least a 25% deposit, and the interest rate will usually be higher than a traditional mortgage. They’ll also need the property to give you a rental income of between 125% and 145% of the interest you’re paying on the mortgage.

Most buy-to-let mortgages are interest-only, which means you won’t be paying the capital on the property, just the interest. So, when you come to sell, or the term of your mortgage is up, you’ll need to repay the entire loan in full.

Bear in mind that, as is the case with a residential loan, your property could be repossessed if you do not keep up repayments on your mortgage.

Another very important consideration before you decide on a ‘buy to let’ are your tenants. Aside from the administrative hassle of finding, vetting, contracting and managing deposits and rent payments, you have a responsibility towards your tenants.

You are legally obliged to ensure the property is safe and in a good state of repair. You must ensure your tenant’s deposit is protected. Your tenant has privacy rights too, so you can’t simply turn up and enter your property.

Your tenants are also protected from unfair rent and unfair eviction, with further mooted changes that mean you might not simply be able to serve tenants notice if you want to sell.

If you’re thinking of taking the plunge and investing in a buy-to-let property, it’s well worth seeking advice from an independent financial planner. They’ll take a holistic view of your current financial circumstances and seek to understand more about your financial goals for the future.

By looking at the full picture, including wider investment opportunities, they’ll be able to help you develop a financial plan that helps you achieve your goals.

To find out more about the benefits of seeking advice from a financial planner: The true benefits of paying for financial advice