It's a bad time to be a buy-to-let investor. Mortgage rates are on the rise and brutal new taxes are in the offing. The burden of regulation - including an obligation to check tenants' immigration status - is weighing more heavily.
But separate to all of that, and arguably far worse, two million small-time landlords also now find they are figures of hate. In cities with acute property shortages and fast-rising prices, like Bristol, they're blamed for pushing up prices, pushing up rents and for preventing younger, would-be homeowners from buying their first property.
Thus when George Osborne announced increased taxation of private landlords in his summer Budget, he was widely cheered.
"The current tax system," he said, "supports landlords over and above ordinary homeowners. Landlords can deduct costs they incur when calculating the tax they pay on their rental income. The ability to deduct these costs puts investing in a rental property at an advantage."
But was Mr Osborne correct? Does the tax regime really favour buy-to-let investors over first-time buyers, or indeed any homebuyer?
First-time buyers vs buy-to-let: the TAX position
At the moment first-time buyers, like all owner-occupiers, pay their mortgage costs out of taxed income.
Like all homeowners, they do not pay capital gains tax on any increase in their home's value.
The current situation for landlords is that they pay income tax on the profits they make after they deduct the costs of letting their property - which include the costs of mortgage interest - from their rental income.
Landlords' ability to deduct mortgage costs before arriving at a taxable profit is the tax "perk" which, under Mr Osborne's proposed changes, will now be withdrawn.
Instead of being able to deduct the mortgage interest cost, landlords will instead get a tax credit worth 20pc of the interest they paid for the year. It would mean investors like Connie Cheuk, an English teacher whose five properties are part of her pension savings, would see their tax bills leap - in her case by almost 40pc.
She argues the tax is unfair as it is "applied to a cost that I bear, rather than my profits".
Landlords must also pay capital gains tax - which is charged at 28pc of the gain for higher-rate taxpayers - on any gains made when the property is sold.
For big landlords, such as Fergus and Judith Wilson, pictured, these CGT liabilities can be substantial.
- First-time buyer calculator: How much can I borrow?
- Buy-to-let rental calculator: How much rent should I charge?
- Buy-to-let mortgage calculator: How much can I borrow?
First-time buyers vs buy-to-let: the MORTGAGE position
Landlords arguably have an advantage here because it is easier for them to obtain interest-only mortgages.
This is due to a quirk in regulation, rather than the tax regime.
The advantage of interest-only mortgages is that on a monthly basis, payments are far lower.
Monthly payments on a 25-year capital repayment mortgage of £200,000 charged at a rate of 4pc are £1,067, for instance.
That same mortgage on an interestonly basis has monthly payments of just £667.
Interest-only deals have all but disappeared for owner-occupier buyers, following tough new rules introduced last year.
Buy-to-let investors will still need to repay the capital loan.
And, as David Hollingworth of broker London & Country pointed out, they pay more interest overall because the capital loan is never reducing.
“This is the downside of interest-only borrowing,” he said. “Lower monthly payments might help cashflow but overall interest costs can be significantly higher.”
In terms of price, however, owneroccupiers have the advantage: buy-tolet mortgages are typically one to two percentage points higher than the equivalent homeowner loan rates.
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AND NOW FOR THE MATHS
The following calculations make several assumptions. First, both the first-time buyer and the landlord have the same deposit (£75,000) and buy the same property for £300,000. The mortgage of £225,000 is taken out at a typical rate of 3pc for the first-time buyer; and 4pc for the buy-to-let investor.
The first-time buyer has the mortgage on a repayment basis over 25 years; the landlord's loan is interest-only. The landlord, who pays tax at 40pc, receives rent of £12,600 per year, giving a yield of just over 4pc.
We assume mortgage rates and rental income remain the same for 25 years. The landlord makes no claims for costs other than mortgage interest. House prices rise at annual 6pc.
First-time buyer
Borrows £225,000 and buys a home for £300,000
Monthly repayments of £1,076.77 for 25 years at a rate of 3pc
Total mortgage payments: £323,031
After 25 years the property is worth £1,339,491 (assuming annual price growth of 6pc compounded)
Deduct your mortgage cost plus deposit (£323,031 + £75,000) = £398,031…
…and your total gain, on selling the property, is £941,460
Buy-to-let investor
Borrows £225,000 and buys an investment property for £300,000
Monthly interest-only payments of £750 (£9,000 per year)
Annual rental income of £12,600
Annual net income before tax (£12,600 - £9,000) = £3,600 Annual net income after tax at 40pc = £2,160
After 25 years the property is worth £1,339,491 (assuming annual price growth of 6pc compounded)
Add total net income over 25 years (£2,160 x 25 = £54,000) = £1,393,491
Deduct total mortgage interest (£9,000 x 25 = £225,000) = £1,168,491 and deduct the original deposit (£75,000) plus the repayment of the capital loan (£225,000) = £868,491
Now deduct capital gains tax of 28pc on the capital gain (£1,039,491 x 0.28) = £291,057.48…
…and your total gain, on selling the property, is £577,434
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