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Is buy to let worth it in 2024?

Is buy to let worth it in 2024?

By
Jenni Hill
Last Updated 2 January 2024

Buy to Let is one of Britain’s best-loved investments, thanks to decades of rising house prices and cheap mortgages. But with interest rates on the rise and mounting pressure to make all rental properties energy-efficient, many are wondering: ‘is buy to let still worth it in 2024?’

Whether you rent out your first home or you’re thinking of becoming a landlord, here’s what you need to know about buy-to-let in 2024. 

In this guide

What are the advantages of buy-to-let properties?

Buy-to-let has a number of short-term and long-term advantages. These include:  

🏠 A regular source of income

Looking for an investment that doubles as a regular source of income? A buy-to-let property could be the answer. The right investment property could help you boost your savings, fund your retirement or simply cover your own living costs. 

Average rents are increasing across the country each year, making buy-to-let an attractive option for investors old and new. Average London rents have risen to a record of £2,627 a month, a 12.1% increase from the previous year. 

Outside of London, average advertised rents have hit a new record for the 15th consecutive quarter - now 10% higher than a year ago at £1,278 a month

Learn more: Buy-to-let vs stocks. Which should I invest in?

🏠 Capital growth

Buy-to-let properties can offer long-term benefits too. It’s no secret that property prices tend to increase over time, meaning landlords can often sell their investment properties for far more than they paid for them. 

In January 2013, the average house price in the UK was £167,716. Today, it's £291,000 - that’s over £123,000 more over a decade! Not only do UK house prices usually increase over time, they also tend to far outpace inflation too. 

🏠 High demand for rental properties 

Rental properties are in high demand, partly driven by supply and demand imbalances.

According to RightMove, the number of enquiries each rental property receives from potential tenants has more than tripled since 2019, increasing from eight to 25 during this period. This is fueled by the affordability gap between what first time buyers can afford, and what buying a home costs.

When demand for rental properties is high and supply is low, this reduces the chances of buy-to-let properties standing empty and makes it easier for buy-to-let investors to find tenants.

What are the disadvantages of buy-to-let properties?

As with any type of investment, buy-to-let offers no guarantees and there’s a risk you could lose money. Let’s take a look at the disadvantages of buy-to-let properties in more detail.

🏠 Interest rates are higher on BTL loans

Interest rates for buy to let mortgage loans are usually higher than those for standard residential mortgages. Higher interest rates will mean that your monthly repayments are more expensive.

🏠 Capital growth is not guaranteed

When we look at average house prices over the last 40 or 50 years, buy-to-let properties can seem like a no-brainer - but the value of your property can go down as well as up. 

Property values can fluctuate in the short term, meaning a house you buy today could be worth less than you paid for it a year from now. This is particularly true for new builds, which often experience a dip in value once they’ve lost their ‘newness’. 

Even older homes or traditional properties that have been newly renovated can lose value, whether it’s due to rising interest rates, growing unemployment or a change in property supply. 

A fall in property value is usually only a problem if you’d like to remortgage or sell. If you have an interest-only mortgage and you sell your property for less than you paid for it, you’ll need to make up the shortfall. 

🏠 Rising mortgage rates

Mortgage rates have spiked in the last year, due to high inflation and more than a dozen base rate rises from the Bank of England. The base rate stood at just 0.10% back in December 2021, meaning mortgage rates were fairly affordable. Today, the base rate stands at 5.25%, making mortgages more expensive than they used to be. 

For example, if you borrowed £300,000 in early 2021 with a 30-year term and an interest rate of 2.09%, you could expect mortgage repayments of around £1,122. 

Today, it’s likely that you’d get an interest rate closer to 5%. So, if you borrowed the same amount with the same term but this time with an interest rate of 5.09%, your mortgage payments would be £1,627 a month.

Rising mortgage rates makes it harder for investors to make a profit on their investment. Plus, some landlords might find it harder to secure a buy-to-let mortgage in the first place, due to difficulties passing lenders’ affordability checks. 

When assessing your buy-to-let mortgage application, lenders will usually assess the profitability of your investment. When discussing profitability, you might hear lenders talk about your ICR - a.k.a your interest coverage ratio. This reflects the amount of gross rental income you need to break even after mortgage repayments, tax, property maintenance and other costs.  If your ICR is too low, and you’re unlikely to get a good return on your investment, the lender might reject your application or offer you a smaller mortgage. 

There is good news, though. Some lenders offer what’s known as a top slicing mortgage. This involves factoring your personal income alongside the rental income to determine how affordable the mortgage will be. 

Not all lenders offer this type of mortgage, so it’s a good idea to speak to an expert mortgage broker before submitting an application. If you’d like help getting a buy-to-let mortgage, talk to Tembo.

Learn more: How to get a buy-to-let mortgage

🏠 Higher taxes

When you purchase a buy-to-let property or second home in the UK, you’ll pay more Stamp Duty Land Tax (or its Scottish or Welsh equivalents) than if you were simply moving house and selling your previous home. The amount you’ll be charged depends on the price and location of the property price. 

If you’re buying a buy-to-let in England or Northern Ireland, for example, you’ll pay 3% more stamp duty land tax (SDLT) than a traditional homebuyer. 

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See what stamp duty you'll pay

Check out our Stamp Duty Calculator to work out exactly how much land tax you’ll pay when buying a buy-to-let in the UK.

Stamp Duty Calculator

Calculate your stamp duty

£

🏠 You can no longer deduct mortgage interest as an expense

Over the last few years, the government has made a number of regulatory changes that have resulted in higher bills for some landlords.

One such change involves landlord’s tax relief. Previously, landlords could deduct their mortgage interest from their tax bill as an expense, reducing the amount they owed HMRC.

This form of tax relief no longer exists and has been replaced with a tax-credit, based on 20% of the landlord’s mortgage interest payments. The new system is less generous for higher-rate taxpayers who previously received 40% tax relief on their mortgage payments. 

Some buy-to-let investors are choosing to purchase their investment properties through a limited company (rather than as an individual) to mitigate the impact these changes have on their profitability. 

A higher rate taxpayer, for example, would pay corporation tax at 19% instead of income tax at 40% when purchasing a buy-to-let as a limited company. This is why it’s a good idea to speak to a financial advisor before making a big investment. 

Learn more: What’s the difference between a buy-to-let and residential mortgage?

🏠 Fixed-term tenancies may soon become a thing of the past

Some landlords might also be affected by the new Renters Reform Bill, which is designed to abolish section 21 ‘no fault’ evictions and make renting more secure. 

As part of the bill, fixed-term tenancies will be replaced with periodic tenancies which don’t have an end date. This could make it harder for landlords to plan the future of their rental property, as they won’t know exactly when their tenants will leave. 

These rolling contracts could also cause difficulties for landlords who let out student properties. Some students may wish to stay in the property after graduation without committing to a full academic year. 

🏠 You may face additional costs if your property is energy inefficient

The government has proposed that by December 2028, all existing privately rented properties will need an EPC rating of ‘C’ or above. All new tenancies will need the same rating as early as December 2025. 

Landlords could face a penalty of up to £30,000 for failing to meet the EPC standards by the applicable deadlines, but exemptions may be implemented to protect property investors who’d need to spend more than £10,000 to bring their rentals up to scratch. 

What is the average profit on buy-to-let?

The average profit on a buy-to-let depends on the type of property you buy, its price and location, and your expenses as a landlord. Property investors often use something known as ‘rental yield’ to determine how much money they can expect from a buy-to-let investment. Rental yield is the amount you can expect to receive in rent annually from a property, expressed as a proportion of the property's market value. The average rental yield in the UK currently stands at 4.75%, with some parts of the UK proving more profitable than others. 

In Edinburgh, for example, the average rental yield is an impressive 9.89%. While Birmingham and London offer rental yields of 6.81% and 6.57% respectively. Newcastle, Aberdeen, Stoke, Manchester, Leeds and Lancaster all offer yields of 6% and above.

To calculate the rental yield before buying a buy-to-let, divide your predicted annual rental income by the price you’re expecting to pay for the property. Next, multiple the number by 100 to get a percentage. 

For example, if you buy a property for £300,000 and make £1,000 a month in rent, you’ll have a rental yield of 4%. 

Here’s how we worked that out: 

£1,000 x 12 = £12,000

£12,000 / £300,000 = 0.04

0.04 x 100 = 4%

Something to keep in mind is that the rental yield doesn’t take into account your expenses such as stamp duty charges, taxes, letting agency fees, mortgage interest and maintenance costs. These can all impact the profitability of your investment. 

What is a reasonable return on a buy-to-let?

A reasonable return on a buy-to-let property all depends on your own finances and goals. For example, if capital appreciation is your main goal, you may be happy with a return of 4% on your rental payments. If, however, you’re investing in buy-to-let property to generate a reliable income, you might decide to prioritise properties that offer a return of 6-7%. 

Keep in mind that buy-to-let returns are not guaranteed, especially when the property investment landscape is constantly changing. Some landlords might have enjoyed returns of 7% a few years ago only for stamp duty changes, the end of landlord’s tax relief, and rising mortgage rates to make their investments less rewarding. 

Is a buy-to-let worth it?

A buy-to-let property can certainly be worth it, but it’s important to crunch some numbers before making an investment. Some people might be better suited to other types of investment such as the stock market

Here are a few questions to ask yourself before investing in a buy-to-let property:

  • Will you earn enough in rental income to cover your mortgage payments?
  • Will you still be able to afford your mortgage if your interest rate rises?
  • What will your rental yield be?
  • Will you make a profit after paying for repairs, maintenance costs and any other landlord expenses?
  • Could you reduce taxes by investing through a limited company?
  • Are you better suited to a different type of investment such as stocks?

Get expert advice from our award-winning team

Investing in property can seem overwhelming, especially with mortgage rates on the rise. But with a mortgage expert at your side, navigating the world of buy-to-let needn’t be a struggle. So whether you’re an experienced investor, an accidental landlord, or you’re thinking of changing your residential mortgage to a buy-to-let, talk to Tembo.

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