Merryn's Blog

Buy-to-let: don’t do it

A lot of people are getting in on buy-to-let with borrowed money. But it’s a risk that isn’t worth taking, says Merryn Somerset Webb.

151123-buy-to-let

More people are getting in on buy-to-let. Brewin Dolphin has done some scary numbers on the issue this week.

Its example has a landlord with an 80% loan-to-value (LTV) mortgage getting £10,000 in rent and paying £8,000 in interest. On his £2,000 profit he currently pays 40% of £2,000 (£800) leaving him a net gain of £1,200. However, come 2020 his tax bill will be calculated on his turnover minus a 20% tax credit. 40% of £10,000 is £4,000. The relief comes to 20% of the interest (£8,000x20%=£1,600). The result is a £2,400 tax bill. Add that to his mortgage interest and you will see that his annual profit of £1,200 turns into an annual loss of £400. Ow.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The Telegraph gets it too. They ran an article this week looking at a higher-rate taxpayer with a £240,000 mortgage on a £300,000 property. He has a five-year interest-only fixed rate mortgage at 3.99%. That costs him £800 a month. He then gets in £1,000 in rental income giving him a current annual profit of £1,440. However, that isn't going to last long.

Assuming his rental income doesn't rise very significantly, his profit falls to £0 in 2019 and becomes a loss of £480 in 2020. There is a calculator for all this on the Telegraph's site.

Advertisement
Advertisement - Article continues below

A large part of the UK population still doesn't seem to think it matters. A YouGov/Brewin Dolphin survey suggests that the vast majority still think that buy to let is a great investment particularly for retirees. Maybe they're right. Maybe rents will rise super-fast from here as wages begin to rise. Or maybe capital gains will be such that no one much cares about cash flow if you are making 20% a year on a house perhaps you can just keep borrowing against that house to cover your cash flow issues? But we aren't so sure.

Not many people are brave enough to lose money on an investment in cash terms every month. And rising housing supply in the UK (note that 75% of developers think it is getting easier to get planning permission here) suggests to us that at some point capital gains will disappoint. Getting into buy-to-let now with borrowed money seems like a risk that really isn't worth taking.

Advertisement

Recommended

Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/520591/are-uk-house-prices-really-on-the-rebound
Property

Are UK house prices really on the rebound?

The latest house price data from the Office for National Statistics paint a picture of a housing market that is showing signs of rallying. That's not …
15 Jan 2020
Visit/520584/weak-inflation-data-may-gives-the-bank-of-england-an-excuse-to-cut-rates
Economy

Weak inflation data may gives the Bank of England an excuse to cut rates

UK inflation is edging lower, and is now well below the Bank of England’s 2% target rate. That could mean even lower interest rates. Here's why. 
15 Jan 2020

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/520553/money-minute-wednesday-15-january
Economy

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020
Visit/520598/money-minute-thursday-16-january-a-batch-of-company-results
Economy

Money Minute Thursday 16 January: a batch of company results

Today's Money Minute looks ahead to results from a host of UK companies, plus the latest unemployment figures from the US.
15 Jan 2020
Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020