Will buy-to-let become unprofitable by 2020?

Conventional buy-to-let arrangements could become unprofitable across 66% of urban areas in the UK, if interest rates rise by 2.5% within the next four years.

Chancellor George Osborne made his intentions clear regarding buy-to-let through last year’s Summer Budget and Autumn Statement, where he outlined plans for:

• Actual tax on investment to double in amount (if not more)
• Tax rate to rise above 100%, meaning an amount higher than profits will be paid in tax

A study by Property Partner of the 100 largest urban conurbations in the UK assessed what a hypothetical interest rate rise (based on current trends) and changes to mortgage tax relief would mean for local buy-to-let investment up to 2020.

The research used average properties with representative rental agreements, based on a mortgage with a 60% LTV buy-to-let loan that’s fixed at 3% for three years.

If rates remained at 3%, net profits on buy-to-let properties would fall from an average of £3,419 to £2,555 by 2020 as a result of mortgage interest tax relief being scrapped. If this rate were to increase to 5.5% at the end of the fixed period, landlords in over 66% of UK towns and cities would be looking at an average loss of £325 per year.

In combination, these factors would cause landlords in locations such as Salisbury to see an average annual profit of £2,200 turn into a loss of £2,984.

So, not only could buy-to-let feasibly become unprofitable within the next four years, it may actually become a bad asset that acts as a drain on your finances. With so much economic turbulence in the buy-to-let market today, it pays to make sure you have access to an accountant with property expertise to guide you through.

If you want more insightful accounting advice for specialist landlords, call on the experts at 3 Wise Bears today.