Do your buy-to-let sums add up?
Buy to let is undergoing big changes. In the past year, the government has ramped up pressure on the sector, bringing in higher stamp duty and limiting tax relief on buy-to-let mortgage interest payments from 2017.
To add to landlords’ concerns, the Bank of England is to regulate buy to let lending from January 2017. Lenders will be forced to “stress test” the loan’s affordability at an interest rate of 5.5 per cent. They would also be required to show that rental income covers at least 125 per cent of mortgage interest payments. Some lenders have already taken this a step further by demanding “interest coverage” of 145 per cent.
The moves are set to make it harder for landlords to borrow the typical maximum 75 per cent of the property’s value when purchasing an investment property, forcing them to inject more equity when buying or seeking to buy in cheaper locations.
The FT has built a calculator to help you decide if your buy-to-let investment is worth it, taking into account your level of borrowing and your personal tax rate.
You estimated the monthly rental income to be £850 on a property worth £450,000. Under an interest coverage ratio of 145 per cent you will:
Higher rate tax relief on mortgage interest for buy to let is to be phased out between 2017 and 2020. Its withdrawal is expected to reduce profits for many landlord investors.
How will the figures play out for individual investors? Assuming mortgage interest of 3.5 per cent on a loan of , annual interest payments will be .
An annual salary of £65,000 plus monthly rental income of £850, implies an income tax rate of. The table below shows how net profit might change as interest relief is gradually withdrawn.
| Year | 2016 | 2017 | 2018 | 2019 | 2020 |
|---|---|---|---|---|---|
| Profit | 0 | 0 | 0 | 0 | 0 |
| Taxes | 0 | 0 | 0 | 0 | 0 |
| Net profit | 0 | 0 | 0 | 0 | 0 |
Please note the calculator is to be used as a guide only. Possible tax deductible costs other than interest payments and furnishing expenses are not considered in the calculations.
Dividend income, savings income, pension contributions, blindness and age may affect tax rates.