4 factors that could kill buy to let investors

With major tax changes the impact of an intest rate rise could kill off many buy to let investors.


Over the last 20 years landlords have enjoyed a increase in property prices, low interest rates and tax breaks, but this is now changing. Landlords profits will be squezed and may even begin to show a loss due the dramatic increase in buy to let taxation especially if there is a rise in interest rates.

3% Stamp duty increase
The first factor to impact landlords is the 3% stamp duty increase on 2nd properties from the 1st April 2016. Although most landlords hold onto their investment properties for many years, which makes this increase less of an issues, it does mean if they move their own property this could be subject to the 3% increase in stamp duty. An extra costs which will reduce profits.

Phasing out mortgage interest deduction on tax payment
The second factor is that from 2017 the ability to deduct mortgage interest costs from income will be phased out. This will results in landlords having to pay more tax which will reduce their income and may in some cases result in a loss. Currently a landlord can deduct mortgage interest costs from their income and only pay tax on the remaining profit. Even if interest rates where not to rise the return on a property investment will be drastically reduced.

An interest rate rise
The third factor is a rise in interest rates. The US Federal bank raised interest rates by 0.25% at the end of 2015. It is predicted that the UK will raise rates in 2016 by 0.5% with further raises over the next few years. An interest rate rise of 2% over the next few years is realistic. With the UK base rate currently at 0.5% an interest rate rise will significantly impact on landlords. They will not be able to offset these increased costs against profits, their investment returns will reduce and many will start to experience a loss.

Falling house prices
This forth factor is a fall in house prices. If landlords do start to pull out and sell their investments this could then lead to falling house prices, good news to first time buyers but bad news to investors. Some investors may default on mortgages especially if interest rates go up further driving a cycle of property price drops.

An example of a what could happen

A typical landlord is a 40% tax payer.
They have a 75% buy to let mortgage of £200,000 on a property worth £267,000.
The interest rate is 2.6% so the interest costs are £5,200 per year.
The rental income is £1200 per month, £14,400 per year a yield of 5.4%
For simplification costs such rental voids and letting agents fees have not been included.
Taxable income is £9,200 per year
Tax bill at 40% is £3680
Income after tax and interest is £5520

Now lets do the same calculations but under the new tax rules where the mortgage interest cannot be deducted.

The interest rate is still 2.6% so the interest costs are £5,200 per year.
The rental income is still £1200 per month, £14,400 per year a yield of 5.4%
Taxable income is still £14,400 per year
Tax bill at 40% is £5760
Income after tax and interest is now £3440 a reduction of 38%

Now if interest rates were to rise by just 2% then

The interest rate is now 4.6% so the interest costs are £9,200 per year.
The rental income is still £1200 per month, £14,400 per year a yield of 5.4%
Taxable income is still £14,400 per year
Tax bill at 40% is £5760
Income after tax and interest is now a loss of £560

If the government had not scrapped tax relief on mortgage interest, and the interest rates where to rise by 2%, the landlord would have made an income of £3120 rather than a loss of £560. The impact of the latest tax changes are dramatic.

Landlords need to review their portfolios to ensure they are not at risk in the future and fully understand the impact of the latest tax changes.

Guide : How to save property tax including latest tax changes

Written by: Houseladder