How to maximise your profits in the 'new normal' for buy-to-let

With landlords continuing to feel the squeeze on their profits, Lucy Waters, Managing Director of Aria Finance, explains why she feels that there are signs of light at the end of the buy-to-let tunnel, if you know where to look.

Related topics:  Landlords,  BTL,  Investing,  Educational Article
Lucy Waters Managing Director, Aria Finance
19th March 2024
To Let 850

The learning objectives for this article are to:

  • Stay informed about what the future may hold for interest rates
  • Understand the tax benefits of a limited company structure
  • Recognise why HMOs often offer higher rental yields than regular properties

Here is a question for you: what do the Spice Girls and buy-to-let have in common? Believe it or not, they both made their debuts almost exactly 28 years ago.

People are often flabbergasted when I tell them that. But until 1996, there was no buy-to-let market as we know it today.

Before then, there were no mortgage products aimed at investors wishing to let their properties out to tenants.

Instead, social renting was by far the more popular form of tenure among tenants while the private rented sector – which was much smaller than it is today – was dominated by professional landlords purchasing properties predominantly with cash.

But when the first buy-to-let mortgage hit the proverbial shelves in 1996, it wasn’t long before middle Britain became hooked.

Rightly or wrongly, buy-to-let quickly came to be seen as an easy path to riches and the perfect way to boost a modest pension pot.

With house prices enjoying almost uninterrupted growth – barring the odd short-lived downturn – since the mid-1990s, it certainly seemed that way for a while.

However, the past seven or eight years haven’t exactly been plain sailing for anyone with an investment property portfolio.

For a start, the tax regime is far more hostile towards landlords than it has been historically.

Since 2016, landlords have been forced to pay higher stamp duty rates when adding to their portfolios.

By 2020, landlords buying in their own name can no longer deduct their mortgage interest from their rental income to reduce their tax bill. It means now they effectively pay tax on their income, rather than their profits.

Moreover, there has been a drive from central and local governments over the past few years to make buy-to-let less attractive in a bid to free up housing stock for first-time buyers.

If that wasn’t enough, then interest rates started rising. Over the past 18 months landlords – like all borrowers – have had to deal with the fastest rise in interest rates in decades.

This is heaping pressure on landlords’ bottom lines. Given everything else they have had to contend with over the past few years, you can understand why some may ask whether there is a future for buy-to-let.

But I believe wholeheartedly that there is. In fact, there are already signs of light at the end of the tunnel for landlords.

Firstly, mortgage rates looked to have peaked. According to data firm, at the end of February the average five-year fixed rate at 60% LTV – a popular option among landlords – was around 4.87%. That compares to 6.18% in August last year.

That’s a significant fall and means the difference between making a profit and a loss for a lot of property investors.

Hamptons, the property firm, estimates that it’s not until rates hit around 6% that most landlords start to lose money on their investments. So, theoretically, most investors should be in the black – even if by a slim margin.

What’s more, mortgage rates could fall even further over the 12 months if the Bank of England (BoE) starts to hint at cutting interest rates.

That’s because movements in BoE Base Rate influence swap rates, which is what lenders use to set the price of their fixed-rate mortgages.

Experts predict that the BoE will be forced to cut rates up to four times this year to boost the UK’s stagnant economy.

If that happens, landlords looking to refinance later this year should have noticeably cheaper mortgage rates to choose from.

Despite this, the cost of borrowing will likely remain significantly more expensive than it was in 2022 when the BoE first started raising interest rates.

That’s why it’s worth ensuring that you plan ahead, make the right investments and ensure your portfolio is tax-efficient to remain profitable. Here are three ways you can do that.

Consider the limited company route

One of the most effective ways to offset rising costs is to buy properties through a limited company rather than in your own name.

Before 2020, if you bought a buy-to-let property in your own name, you could deduct your mortgage interest from your rental income. But that’s no longer the case.

Instead, you receive a tax credit worth 20% of your mortgage interest, which is a less generous deal for higher-rate taxpayers.

In effect, it means landlords purchasing properties in their own name pay tax on their rental income, rather than their profits.

But if you purchase a property through a limited company, you can offset all your mortgage interest – and other expenses – against your rental income to reduce your tax bill.

You’ll also be charged corporation tax (25%) on your profits, whereas you pay income tax on your profit when you own in your own name. Therefore, if you’re paying a higher rate of income tax (40%), going down the limited company route may mean a lower tax bill.

But while there are plenty of pros to owning properties in a limited company, there are also drawbacks.

For a start, it’s unlikely it will make sense if you’re a basic rate taxpayer. There is also more admin involved, while you’ll find there is also a smaller pool of mortgages to choose from.

There may also be tax implications for purchasing through a limited company structure, so see professional tax advice.

Put down a bigger deposit

If you have the means to put down a bigger deposit when you buy a property or come to remortgage, chances are you’ll qualify for a better rate.

The bigger your deposit (or equity, if you’re remortgaging) the less of a risk you are in the eyes of a lender.

For example, at the end of February, the average two-year fixed rate for a landlord with a 40% deposit was 5.22%. Whereas for a borrower with a 20% deposit, the average rate was 6.3%.

On a £250,000 interest-only loan over a 25-year term, the difference in the monthly repayment between those two rates is around £225 a month.

Clearly, not every borrower will be able to find the extra money, but if you can, it’s worth considering.

Look to HMOs for higher yields

If you’re looking to boost your profits, you may want to consider houses of multiple occupation (HMO).

An HMO is usually defined as a house containing at least three tenants and more than one household sharing common facilities such as the bathroom and kitchen.

HMOs are popular among young professionals working in major cities, as it’s usually much cheaper than renting a whole apartment to themselves.

That means they are usually in high demand and because you are collecting rent from multiple tenants, rather than a single household, the rental income – and therefore the yield – you can achieve tends to be higher.

Visit Aria Finance’s website to find out more about how they can help you with your property finance goals:

If you have any questions or would like to discuss a deal please email

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To recap, this article has helped you...

  • Stay informed about what the future may hold for interest rates
  • Understand the tax benefits of a limited company structure
  • Recognise why HMOs often offer higher rental yields than regular properties
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