Is buy-to-let still a good investment?

Lots of landlords and property investors, including many people investing to supplement their retirement income, have been able to enter the property market over the last decade thanks to buy-to-let.

The ability to get an affordable buy-to-let mortgage has opened up the door to many people who would have otherwise considered property investment too costly and risky.

However, times have changed and several adjustments to taxation and interest rates are now dissuading others from buy-to-let and forcing others already in the market to sell.

So, should buy-to-let still be considered a worthwhile investment?

Interest rates

With the Bank of England base rate continuing to rise as a means of combatting inflation, many lenders are reducing the number of buy-to-let products available and increasing the rates of interest on those that they continue to offer.

This has resulted in the profits of many landlords being whittled away, with many now concerned about making any return at all on the properties they own.

With rates forecast to continue to rise, those with buy-to-let mortgages will need to consider whether their investment will remain worthwhile and affordable.

Mortgage interest relief

Previously, buy-to-let landlords could deduct all of the interest they pay on their mortgage before paying tax.

For higher-rate taxpayers, this effectively gave them 40 per cent tax relief on all of their mortgage payments, boosting their income from the properties they owned.

However, under the current rules, landlords now only enjoy a flat-rate tax credit based on 20 per cent of their mortgage interest.

Under the same rules, landlords must declare the income used to pay their mortgage on their tax return.

This put an end to the previous rule that allowed them to declare rental income after deducting mortgage repayments.

As a result, many investors have found themselves dragged into higher income tax bands, which drives up the amount of tax that they pay on all of their earnings.

Property values

Although the two previous points may dissuade some investors, the reality is that property prices continue to rise.

While the media is full of scare stories at the moment about property prices falling by as much as seven per cent as a result of mortgage rates soaring, the reality is that long-term prices are likely to continue to rise.

The main reason for this is supply vs demand. In the UK there is a shortage of housing, particularly in certain areas.

Estimates suggest that more than 300,000 new homes per year would need to be built to keep up with expected demand, but the reality is that this target isn’t being met.

Therefore, it is more likely that house prices will rise long-term rather than fall. Similarly, as fewer people can afford to buy as a result of this trend rental yields are likely to also rise over time as demand for lets continues to rise.

Property investment can be lucrative, but it is important to seek independent financial advice to make sure it fits in with your wider wealth plan.