Arguably, one of the most controversial changes by the Chancellor of the Exchequer was a buy to let mortgage tax change, applicable to the mortgage interest payments for buy to let landlords.
Buy to let investment has been extremely popular in the UK as investors have favoured the exceptional capital growth that the British property market has experienced in recent years. This sector has performed particularly well of late in comparison to the potentially volatile equity based investments that occasionally experience frequent and large drops in value.
One of the reasons that this sector has performed so well is because of the buy to let tax reliefs which landlords have to this date wholly enjoyed. In his emergency budget, however, the chancellor said that the relief would be cut to 20 percent from 40-45 percent in order to even the “playing field” between buy to let landlords and ordinary house buyers.
The buy to let mortgage tax change, due to come into place at some point between 2017 and 2020, is predicted to make buy to let a less attractive proposition for UK landlords.
Grainne Gilmore, head of UK residential research at Knight Frank, described the change as a “significant change in tax status” for those with a rental portfolio. The change is also anticipated to lead to higher rents and is likely to affect “generation rent” more than anyone else.
The property market at large have received the news negatively – saying that the move is likely to shake up the market and will ultimately just result in higher rents.
The broad consensus seems to be that the buy to let change will make investment a less attractive proposition for landlords – particularly those who are most highly leveraged.
Although at the same time Hugh Wade Jones, Managing Director at Enness, states: “these changes to the tax reliefs that buy to let landlords enjoy will have a limited impact on the mortgage or property markets. These are proportionate “softening” reforms, unlikely to mature until 2017, which are not going to deter any buy to let landlords from bolstering their portfolios. It’s important to remember that these tax reliefs are just one of the many costs surrounding owning and maintaining buy to let property that can be offset against tax. Those landlords heavily geared and relying on offsetting every last penny are a thing of a the pre-crash era”.
It stands to reason that the solidity of a sound London property investment is not going to fully loose its appeal for buy to let, particularly with the pensions freedoms reforms. The overall attraction of London’s bricks and mortar cannot be too adversely affected, supports Peter Mackle, senior partner at Property Vision.
James Ferguson, Adviser at Enness Wealth comments, “Whilst the ability to obtain tax relief on mortgage interest has been a “tick in the box” for buy to let investors, I think the cap at 20% won’t deter would-be investors. With buy to let lenders having recently introduced stringent safeguards on the rental incomes required to service the mortgage payments, most investors with debt against the property will feel little impact on the financial viability of the investment”.
With that in mind, it’s also not all bad news for landlords on the mortgage market front. Indeed, lenders expect mortgage rates to fall further in the coming three months. The Bank of England’s quarterly Credit Conditions Review shows lenders expect a “slight” reduction in prime residential rates and a “significant” reduction to buy to let rates in the third quarter of this year.
Overall this year, mortgage rates have continued to fall. Particularly when it comes to lower loan-to-values, making this an excellent time to invest in buy to let.
If you are interested in becoming a buy to let investor it’s best to have a long-term investment strategy in light of buy to let after the budget. Fundamentally, you’ve got to protect your existing level of rental income and take a longtail view of how much debt you’re prepared to hold against the asset, in light of the returns.
If you would like to explore buy to let investment – as a topic in general or in light of these reforms – please contact someone at Enness for a free consultation to explore your options.