Mortgage Intelligence Update: Buy to Let – Facing the winds of change
Head of Mortgages and Insurance Stephanie Charman reflects on an interesting time for buy to let with the upcoming changes to tax relief.
April’s alterations to tax relief will soon join several other key changes that the buy to let sector has faced in recent years. It is an interesting time for the industry, with the changes being another political step towards curbing a sector that has seen steady growth since 2008.
Once the changes are phased in, tax relief will revert to a flat rate of 20%, which means landlords on higher incomes may find themselves losing more in mortgage interest payments. But what does all this mean for buy to let going forward?
The story so far
The buy to let sector has been targeted for a raft of changes. One of the most impactful of these was the April 2016 stamp duty changes on second homes, which added 3% to the stamp duty bill. This was seen as a longer-term solution to reduce the incentive to invest.
The Prudential Regulation Authority’s consultation paper on lending standards has meant a tightening of criteria for buy to let lending. This includes stress testing against higher interest rates and increasing income cover ratios (ICRs) up to 145% or more.
Lenders have acted promptly to adjust their criteria. This means potential challenges for both those considering remortgaging who took out their mortgage under previous affordability, and investors looking to purchase another property. The effect that this has on landlords will depend predominantly on the amount of their mortgage in relation to the value of the property and the rent they receive.
Another contested change
Despite changes to stamp duty on second homes and new stricter affordability rules, it is the 2017 changes in tax relief that have seen some of the strongest protestations. To avoid the changes, some landlords will be considering a limited company set-up going forward, in order to be exempt from the reduction in tax relief.
A survey by the Royal Institute of Chartered Surveyors (RICS) revealed that as a result, investors will likely be reducing the number of properties they own. With the changes in tax relief adding to the previous alterations, the survey found that 26% more contributors expected landlords to scale back their portfolios, rather than expand them.
Although some of the extra costs may be passed on in the form of rent increases, it is just as likely to have the effect of freeing up property for first-time buyers. But with house building still not at the level required to reach government targets, affordability remains the overriding obstacle for many young homebuyers.
An uncertain future
Some lenders are already reporting a drop in buy to let lending, which has resulted in some traditionally buy to let-only lenders moving into the residential space. It seems that all involved in the sector, whether landlord, lender or first-time buyer, are keeping their eye on the effect of all these changes.
The government’s housing whitepaper, released in February, also looks to further assist developers in building the much-needed homes and streamline the planning system. The whitepaper also announced that the government would be generally changing policy towards supporting renters, as well as homebuyers, by removing agent fees and encouraging longer term tenancies.
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