Buy-to-let: don’t do it

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 (£8,000×20%=£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.

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.

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.