Over the last decade, there have been many changes, including to mortgage interest relief and a stamp duty surcharge, leaving many potential landlords asking: ‘Is buy-to-let still worth it?’ 

These changes have hit landlords’ profits, while mortgages are much more expensive.

So, should you give up on buy-to-let property – or is it still a useful source of income?

Summary

• UK property prices have recently fallen, making buy-to-let more risky than in the past.

• There are a range of pros and cons to investing in buy-to-let properties.

• There are some alternatives to buy-to-let.

• It's best to get professional financial advice before making any big decisions.

How has buy-to-let changed?

In November 2023, UK property prices declined at the fastest pace in over a decade, making buy-to-let more risky than in the past. 

The government has clamped down on the buy-to-let market in recent years with changes to the tax system. 

In April 2016, it added a 3% surcharge in stamp duty on additional properties, including second homes and buy-to-let properties. 

Since April 2020, landlords cannot deduct the interest they pay on their mortgage before paying tax, which gave higher-rate taxpayers 40% tax relief on their mortgage payments. 

Now, landlords get a flat-rate tax credit based on 20% of their mortgage interest. While this doesn’t negatively impact basic-rate taxpayers, it affects landlords who are higher and additional-rate taxpayers. 

Landlords also have to declare the income used to pay their mortgage on their tax return, while under the old system, they could declare rental income after deducting mortgage repayments. 

This apparent income rise may push some into a higher-rate tax band, which means a bigger tax bill. 

In a spot of good news for landlords, capital gains tax on property was recently cut for residential property from 28% to 24% for higher-rate taxpayers.

Multiple dwellings relief for stamp duty, which applies to buying more than one property in a single transaction, will be abolished from 1 June 2024. 

However, there’s the Renters Reform Bill, which could be passed into law this year and includes many reforms to make renting fairer for tenants, while landlords cannot impose blanket bans on tenants.  

Under the Renters Reform Bill, new rules will be introduced to determine how often rents can rise, and tenants can challenge excessive increases. 

On top of this, mortgage rates have soared over the last year or so. While rates have recently fallen, it’s still more expensive to get a mortgage. 

How have buy-to-let profits changed?

Mortgage interest relief is no longer available, so many landlords have seen their profits significantly fall – in particular, higher-rate taxpayers. 

As they can no longer receive 40% tax relief on their mortgage payments, their tax relief is halved. 

These changes are particularly challenging for landlords with interest-only mortgages paying higher tax rates. 

Here’s an example of how their tax has changed – it’s for a landlord paying £500 a month in mortgage interest and earning £1,000 a month in rent.

Is buy-to-let still a worthwhile investment?

The answer to whether buy-to-let is still a worthwhile investment goes beyond the issue of tax.

To a large extent, it depends on the type of investment you’re looking for and the ultimate goal of your investing activities.

Here are some pros and cons of buy-to-let to generate a return.

Advantages of buy-to-let

• You’ll earn rental income. In some areas of the UK, such as Sunderland, Dundee and Glasgow, rental yield is as high as around 8%, while other areas are lower. 
• At the same time, you could generate capital growth as your money grows due to your property’s value increasing. 
• You can take out insurance to cover against loss of rental income, damage and legal costs. 

Disadvantages of buy-to-let

• Your tax bill will be higher than before April 2020, leaving you with less profits. 
• If property prices fall, your capital will reduce. And if you have an interest-only mortgage, you’ll need to make up for any shortfall if the property sells for less than you bought it for. 
• You’ll need to factor in the costs of stamp duty, insurance and wear and tear. 
• Being a landlord is a big responsibility. Check out our useful tips before deciding. 
• If you sell your buy-to-let property, you’ll face a higher tax bill as the capital gains tax allowance was cut to £3,000 from April 2024. 

Lots of people choose buy-to-let as a retirement income, often taking tens of thousands of pounds out of their pension pot to do this.

If you're considering this, it is vital you speak to a financial adviser first, as accessing your pension pot can have big implications and potential tax penalties.

How do I get started with buy-to-let?

Your journey to becoming a landlord will typically involve these five steps: 

Step 1: Get your finances in order and speak to a financial adviser, to decide how much money to invest and the returns you should aim for. Also, speak to a mortgage broker to get the best deal or a mortgage in principle so you’re ready to make an offer when you find the right property. 

Step 2: Find your property and get your offer accepted. This might be quicker than buying a home if the property is already rented, but it might not be. Allow a few months for the process. 

Step 3: Take out insurance. Along with buildings insurance, you’ll want to protect against unexpected costs like injuries to tenants, damage and loss of rent. 

Step 4: Find tenants. You can go through an agency or find your tenants privately. The right option for you depends on how involved you want to be. But remember: even if you hand-pick your tenants and already know them well, draw up a legally binding contract.  

Step 5: Buy-to-let is a hands-on investment. You’ll need to keep reviewing your mortgage and conduct necessary maintenance on the property. You should also make sure that your income from buy-to-let is handled in the most tax-efficient way – an accountant can help. 

Check out our guide to buying to let. 

What are some good alternatives to buy-to-let?

As an investment, buy-to-let has much to offer: a regular source of income plus a potential long-term yield from any increase in the property’s value. 

However, it is a high-maintenance investment, and your asset is locked away for a long time and hard to access. 

So, depending on your investment goals, it’s worth considering if any alternatives are a better fit. 

Real-estate investment trust (REIT) 

If you want to invest in the property market without fixing a boiler every other winter, then a real estate investment trust (REIT) might be an option. 

You can pool your funds with others and invest in commercial properties, all through investment companies trading in public markets. 

But these long-term investments usually involve locking your money away for several years. 

That said, it is a more liquid form of investment than directly owning a property. 

Bonds 

Bonds are a relatively stable, low-risk investment, although some are more risky than others. 

Bonds are essentially loans made by the investor to a borrower (often a government or large organisation) and are repaid over a set period at a fixed rate of interest. 

As well as government bonds (gilts), large companies across the UK offer these investments. You can choose different length bonds, keeping your money tied up for just one year or up to 10 years. 

Peer-to-peer lending 

Various platforms allow you to offer loans directly to small businesses and individuals. By cutting out the middleman, peer-to-peer (P2P) lending tends to generate higher returns than cash savings or bonds. 

The downside is that the risks are higher than either, and your money isn’t protected by the Financial Services Compensation Scheme. 

However, this can be a good platform for investors who want to take more risk for the sake of higher potential returns. And of course, you can invest smaller sums than you would in a property. 

Shares 

Shares are considered high-risk investments, which means they are volatile and likely to fall in value during some periods and rise in others. 

The typical return from shares over the longer term can be rewarding if you’re patient. Your money also isn’t tied up for as long as it is with property. 

But be prepared for a bumpy ride, and don’t invest any money you might need over the next few years. 

You can find out more about investing here. If you found this article helpful, you might also find our article on renting or buying a house informative, too! 

Need valuable advice on investing in buy-to-let?

Unbiased can connect you with a financial adviser or broker who can offer insightful advice over whether buy-to-let is the best option depending on your circumstances and money goals.