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When we are helping our clients to find the best mortgage to suit their needs, our expert team of independent mortgage advisers at PIL Southampton is often asked whether taking on a buy-to-let property is a wise move.
For many years, it seemed to be a pretty safe bet that the property you invested in would increase in capital value, and that your mortgage payments and other costs would be covered by your rental income.
Is that still the case today? Let’s look at the current state of play.
This is the first question on everyone’s lips. And you won’t be surprised to hear that our answer isn’t a straightforward yes or no.
If you’re looking for a quick return, the answer is probably no. Buy-to-let should be seen as a medium- to long-term investment to give the property’s value time to increase, not that this is ever guaranteed.
It’s also worth noting that there have been a lot of regulatory and tax changes in the buy-to-let market that have had a negative impact on landlords’ profits. These include cuts to mortgage interest tax relief, new legislation regarding the standard of accommodation you need to provide, more protection for tenants and higher rates of stamp duty for additional properties – it’s risen from 3% to 5% in the 2024/25 tax year.
You’ll need to consider your finances carefully, for example, the fact that you might not be able to rent the property out continuously and would therefore need to find the money to pay mortgage repayments yourself. There may be unforeseen high maintenance costs to pay too, like a new roof or boiler.
On the upside, relatively high demand for rental properties compared to the number of rental properties available means that rental income is looking favourable in many locations.
For most people, paying off the mortgage on their home is a top financial priority. However, with a buy-to-let investment, your priority is likely to be the level of return on your investment.
When you purchase a buy-to-let property with a mortgage, your mortgage provider is like a silent business partner who is funding 75% of the investment without receiving 75% of the profits.
To illustrate:
You obviously also have to take into account fees and interest payments on your mortgage, but you can see how buying with a mortgage rather than with cash could give you a significantly higher return.
A buy-to-let can be a solid investment if property values rise significantly during the time you own the property, and if you are able to rent your property out to reliable, paying tenants throughout the time you own the property.
It can also be a financially advantageous way to provide your children with comfortable housing if they’re living away from home whilst at university. If the child’s name is on the deeds and it’s their only property, when you come to sell the property it should be exempt from CGT.
There is no certainty that the value of the buy-to-let property will increase, or that you will be able to find tenants to live in your property so that they can cover your mortgage payments and other costs associated with owning and maintaining a home.
Owning and managing a buy-to-let property could be more time consuming than you anticipate – you simply might not need the extra hassle in your life.
We would recommend that you turn to an independent financial adviser experienced in this area, like our expert team at PIL Southampton. They can appraise your financial situation and help to guide you through all the financial implications of your buy-to-let investment when you consider it as part of your overall investment portfolio.
This should be a fundamental first step of your process, to ensure you minimise any tax liabilities and potential inheritance issues.
A financial adviser can help you to work out your financial strategy, based on your individual circumstances. They will discuss with you whether you want to use your rental property as a holiday let before eventually moving into it yourself when you retire, or if you are buying a second property to make as much rental income as you can and to hopefully benefit from the capital gain when you sell.
Your financial adviser will ask you to think about what level of return you are ideally looking for, and when. Your answers could help to determine the kind of property that you buy, as each type has different levels of rental yield and expected capital growth.
They will also explain the risks outlined. Though you are unlikely to end up in a negative equity situation, due to the amount of equity you would have had to put down to buy the property, ongoing costs may rise and you may experience sizeable ‘void’ periods, where your property is left vacant and you have to find the resources to pay for your mortgage when there’s no rent coming in.
When you sell the buy-to-let property, you will be liable for Capital Gains Tax (CGT), which will be charged on the money you make on the sale after the original purchase price, legal costs and capital improvements have been deducted. Current CGT rates in the 2024/25 tax year are 18% at the basic rate and 24% at the higher rate. This has increased from the previous 10% and 20% rates.
There are specific tax rules around buy-to-let that can be complex so, if you don’t know this area inside and out, a tax expert who does could be incredibly useful. They can walk you through allowable expenses that you can deduct from the rent you receive before income tax is payable.
They can also explain to you how restriction loan interest relief works for buy-to-let landlords. The amount of income tax relief you can get on residential property finance costs is now limited to the basic rate of income tax. It’s not applicable to capital repayments of a mortgage or loan but does include the fees you incur when taking out or repaying a mortgage or loan, as well as mortgage interest and interest on loans to buy furnishings.
There is tax relief available on costs incurred to replace kitchenware, appliances and furnishings across a range of properties run as businesses.
Many buy-to-let mortgages are only available through mortgage brokers, so working with an independent adviser like one of the team at PIL Southampton, will mean that you have access to a wider range of options.
They will use their skills, coupled with the knowledge they’ll gain from getting to know you, your circumstances and your needs, to help you to define the rental income you need to support your mortgage application.
It might be that your buy-to-let property investment is straightforward and can be processed by a standard conveyancing solicitor. However, if your situation is more complex, for example you would like to bequeath the property when you die, or you are buying a property with an existing tenant, then we would recommend that you engage a legal specialist who is experienced in lettings.
Asking local estate and letting agents for advice on the kind of rental property that is popular in their area could be invaluable. They will know what kind of property is in high demand – an apartment close to good transport links for commuters perhaps, a shared student house close to a university or a three- or four-bedroom home near a school for example.
They will also have a good feel for the rental value of various properties, to assist with your budgeting and forecasting, as well as being able to advise you on the level of decoration and furnishing that different tenants would expect, to give you the best chance of letting your property quickly.
First, make sure your finances are in order and talk to a financial adviser about how much money would be right for you to invest, and the returns you are aiming for, to find the best deal possible. They can help you obtain a mortgage in principle in place so that you’re ready to put your offer in when you find the property you’d like to buy.
When you’ve found the right property to suit your needs and had your offer accepted, you should look at taking out specific buy-to-let insurance to protect you from incidents like damage or loss of rent.
Last, but by no means least, you’ll need to find your tenants! You can do this privately, or through an agency, depending on how involved in the process you’d like to be. However you find your tenants, and even if you already know them well, it’s important to get a legally binding contract drawn up.
Running a buy-to-let property is a hands-on investment. You will need to keep the property well maintained, regularly review your mortgage and make sure that you’re managing rental income tax-efficiently.
Our expert team of friendly, independent financial advisers is here to guide you through every step of the buy-to-let process.
You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.
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Protection & Investment Ltd is an Independent Financial Adviser which is authorised and regulated by the Financial Conduct Authority [Reg No 222993]
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