Mortgages  

Buy-to-let landlords ‘in debt by 2020’

Buy-to-let landlords ‘in debt by 2020’

Traditional buy-to-let (BTL) could become unprofitable in seven out of 10 UK towns and cities if mortgage rates increased by 2.5 percentage points over the next four years, according to research.

Crowdfunding platform Property Partner looked at more than 100 of the largest towns and cities in the UK to see what impact a base rate increase, coupled with the changes to mortgage interest tax relief, would have on local BTL markets.

The platform’s research suggested that by 2020, BTL investors will have lost higher-rate tax relief on their mortgage interest payments, and the average investment property will be making an annual loss of £325.

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Researchers at Property Partner took an average property, let out at a rent typical of the area in each of the towns and cities studied.

It assumed the property was mortgaged with a 60 per cent loan-to-value BTL loan, fixed for three years at 3 per cent.

The average annual net profit would be £3,419 at present, looking at the country as a whole, but would fall to £2,555 by 2020 – even if rates remained unchanged – as a result of the phasing out of mortgage interest tax relief.

Currently, landlords renting residential property can claim relief for mortgage interest (not the repayment of capital) against their rental income, unlike home owners.

New measures will be introduced gradually from 6 April 2017, but will not affect properties that qualify as furnished holiday lettings.

Relief for finance costs will be restricted to the basic rate of income tax.

Property Partner’s research revealed Salisbury would be the worst-hit town in 2020 if rates went up by 2.5 percentage points.

10 worst-hit towns and cities in the UK in 2020 if rates went up by 2.5%

Town/City

Average House Price (£)***

Average Rent/pm (£)****

Annual profit today (£)

(3% B2L mortgage)

Annual profit 2020 (£)

(3% B2L mortgage)

Annual profit 2020 (£)

(5.5% B2L mortgage)

Salisbury (South West)

332,314

804

2,200

1,003

-2,984

Chichester (South East)

396,978

1,072

3,431

2,002

-2,762

Truro (South)

307,431

752

2,094

987

-2,702

Cambridge (East)

427,856

1,233

4,257

2,716

-2,418

Lichfield (West Midlands)

280,112

702

2,029

1,021

-2,341

Exmouth (South)

269,365

671

1,922

952

-2,280

Warwick (West Midlands)

362,429

1,015

3,394

2,089

-2,260

Winchester (South)

513,075

1,580

5,835

3,988

-2,169

Chelmsford (East)

348,875

978

3,274

2,018

-2,169

Taunton (South West)

257,281

649

1,894

968

-2,119

Source: Property Partner

In Cambridge, the average profit today is £4,257, but would plummet into the red with a £2,418 annual loss in 2020.

Adviser View

Paul Lindfield, director of wealth management at Manchester-based Sedulo Wealth Management, said the impact would be far reaching, not just in terms of profitability but in other areas too.

He said: “The new tax calculation for mortgage interest means that people can now lose child benefit inadvertently when their incomes go over £50,000 caused by rental income, and they lose their personal allowance when they go over £100,000.

“All of a sudden owning a buy-to-let property can impact you quite substantially by 2020. It is not just profitablity. It can impact on quite a few things.”

ruth.gillbe@ft.com