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Buy-to-let Britain: a divided nation – our model and methodology

Posted on 12/09/2018, by Joe Jones

To gauge the attitudes of those with buy-to-let properties, we surveyed 1,002 UK landlords aged 18 or over from 6 to 14 July 2018. And to explore the profitability of buy-to-let, we built a model to analyse the income and costs associated with buying, running and selling an additional property over an eight-year period.

Like all models, we made a number of assumptions. We have used the 2017 average UK house price growth statistics (source: Land Registry) and rental yield figures (source: LiveYield ), and incorporated the gradual removal of the ability to offset interest repayments against any income tax bill which a property may generate.

We have also assumed that the property is held for eight years and then sold, so as to account for the potential capital growth associated with holding a buy-to-let property as well as the day-to-day income.

This has allowed us to produce two different metrics: the overall annual return (‘internal rate of return’ or IRR ), which assesses the overall performance over the whole eight years including the value of the sale; and the annual cashflow, which looks at the income and costs associated simply with running a buy-to-let on a yearly basis.

Our assumptions:

  • Average loan-to-value (LTV ) of a buy-to-let mortgage – 70% (Source: Council of Mortgage Lenders, ‘The black and white of buy-to-let: what does the data show?, March 2016)

  • Property value – £300,000 outside of London (the UK average is £243,583. Source: Land Registry ‘House Price Statistics, June 2017-June 2018); £475,000 in London (Source: Land Registry)

  • Mortgage arrangement fee – £1000 (Source: Moneysupermarket, July 2018)

  • Interest rate (assuming interest-only mortgage) – 4.5% (a low average based on the mortgage size and LTV. Source: Moneysupermarket, July 2018)

  • Early repayment charge – 1% (the lower end of the Money Advice Service’s 1-5% estimation. Source: Money Advice Service, ‘A guide to mortgage fees and costs’, July 2018)

  • Exit fees (estate agents & solicitors) – 1.5% (Source: Which?, ‘The cost of selling a house’, June 2018)

  • Maintenance & estate agent fees – 15% of rent (Source: Which? ‘Using a letting agent, May 2018)

  • Repairs and Upkeep – 0.2% (Source: The Property Voice, ‘Buy-to-let slush fund – what’s the right level?’, September 2014)

  • Tax band – we have assumed that the landlord is a higher rate (40%) taxpayer