Historically, buy-to-let (BTL) investments have been a lucrative choice for many investors. With landlords or property managers overseeing day-to-day operations, BTL represented a hands-off investment. Furthermore, rents collected from tenants allowed investors to safely earn regular, passive income, and low costs thanks to historically low interest and rates kept returns stellar.
Recently, however, BTL has lost much of its luster: new rules on both landlords and investors, economic woes, shifting political winds, and other factors have undermined the strength of this once-prized investment vehicle. Below, I’m going to trace the causes behind the recent decline of BTL investment—and what that means for current investors.
As recently as April 2017, landlords were able to deduct the full sum of their mortgage interest from their tax bill. This effectively rendered the mortgages on any properties they operated as interest-free, thus allowing landlords to add a healthy amount to their profits and to the returns they paid out to investors. Today, however, only 75 percent of mortgage interest costs are tax deductible, which takes a significant bite out of landlords and investors’ earnings.
What’s more, the size of mortgage interest deductions will shrink from 75 to 50 percent during the 2018-2019 tax year and all the way down to 25 percent in 2019-2020; by 2021, financing costs taken on by landlords will only be entitled to a basic tax deduction. This growing tax burden on landlords spells trouble for BTL investments.
For years, interest rates in the UK have cruised at historic lows. For landlords, this trend has meant that the cost of mortgages has also been historically low—as I reported in a previous article—so landlords and investors have been able to enjoy higher earnings as a result. That may change when the Bank of England meets in November, as they are widely expected to increase interest rates for the first time in 10 years. Borrowing costs will therefore increase for landlords, and coupled with their greater tax bills, the appeal and the profits of BTL investment will plummet.
As of 30 September, new rules took effect that applied to landlords with four or more mortgaged properties. If landlords in this category apply for a new mortgage, the loan will seek to evaluate the affordability of the applicant’s entire portfolio, not just the property in question. This regulation will make it more of a challenge for landlords to grow their portfolios and for investors to grow their returns.
At Avantis Wealth, we’ve heard stories from our clients who were unsure how to make their money work for them in uncertain times such as these. That’s why we developed the F.R.E.S.H. Investment Strategy, which, among other things, offers fixed income, a hands-off approach, and typical returns in the realm of 7-15 percent annually. To learn more about the F.R.E.S.H. system and what Avantis can do for you, then you can request a copy of our special report by emailing firstname.lastname@example.org or calling +44 1273 447 299.