In Depth

Buy-to-let mortgages pulled at fastest rate since 2009

Dramatic fall follows changes in tax regulations and tough new affordability tests from the Bank of England

Buy-to-let mortgage offers have been pulled from the market at the fastest rate since the banking crisis, reports the Daily Telegraph.

A report from Moneyfacts shows the number of available buy-to-let mortgages has fallen from 1,482 to 1,408, "the largest drop in numerical terms since March 2009, when lenders drew back from the sector and concentrated instead on mainstream homeowner business", adds the paper.

Loans for those with 25 per cent deposits - "normally the smallest deposit lenders will accept" – have been hit hardest, falling from 606 to 540, more than ten per cent.

In part, the cuts are a response to the introduction of tighter Bank of England rules requiring lenders to apply new affordability tests based on hypothetical interest rates of up to 5.5 per cent. 

As rents must now make up as much as £140 for every £100 of mortgage interest, up from £125 previously, landlords have to either take out smaller loans, requiring bigger deposits, or pass the cost on to their tenants

Designed to prevent a bubble in buy-to-let lending, the reforms also take into account the hit to landlords' profits from a series of tax changes. Stamp duty on second homes rose three per cent last year while the ten per cent flat rate tax break for property maintenance was removed.

From April, landlords will also lose tax relief on mortgage interest, which will be reduced to the base income tax rate, which is 20 per cent, doubling bills for higher-rate taxpayers and dragging more into the tax bracket.

Landlords say it could leave them paying hefty taxes despite making a loss.

However, many argue the reforms level the playing field for hard-pressed first-time buyers.

Moneyfacts' Charlotte Nelson said: "Lenders appear to be withdrawing products to get back to just a 'core' range in an attempt to wait and see what other providers will be doing in the run-up to April."

Has the buy-to-let sector really collapsed? 

9 December

Figures from nationwide estate agency Haart have laid bare the "full shocking extent of the buy-to-let market collapse", says the Daily Telegraph.

Sales for the 12 months to November were down 64 per cent on the previous year, says the paper, "dropping 8.2 per cent in the last month alone". 

There is little sign of activity picking up, it predicts: the number of prospective "landlords registering to buy properties is down 52.9 per cent annually".

The Council of Mortgage Lenders told The Guardian: "We are currently running at around 6,000 new purchases a month using buy-to-let mortgages, compared with 10,000-11,000… last year."

Paul Smith, the chief executive of Haart, said the sharp decline was the result of the government's "war on landlords", who have been cast as "pantomime villains of the property market".

The government raised stamp duty on second homes three per cent in March, on top of an increase in the up-front tax at the very top end of the property market in 2014.

Also this tax year, the flat-rate ten per cent maintenance allowance – a tax break nominally to account for repairs, which are considered a business expense – was scrapped and landlords made to claim for their actual costs.

The big hit is still to come: by 2020, mortgage interest will no longer be tax deductible and landlords will be given a tax rate based on gross income and then paid a flat 20 per cent rebate.

This will push more into higher-rate tax brackets and halve the tax relief on mortgage interest in those higher bounds. It is also claimed it will result in landlords paying tax even when they make an annual loss.

The measures are meant to prevent first-time buyers being out-muscled in the property market by the booming buy-to-let sector. But Haart says the result will simply be to reduce the housing stock for hard-pressed households that cannot afford to buy and increase rental prices.

This is not being supported by market reports so far. Haart itself acknowledged there had been a five per cent decline in new tenants in November, which dragged average rental prices lower.

In October, property website Rightmove said demand from would-be landlords was recovering and supply of rental homes rising, holding rent increases below inflation across the country and depressing them in the capital. 

Buy-to-let owners set up companies and increase rents

2 December

Buy-to-let homeowners are "scrambling" to take action to avoid a hit to their incomes from a looming tax crackdown, says The Guardian.

Landlords are moving in ever-larger numbers to set up companies to house their property portfolios, transferring properties into the names of family members. Others are looking to substantially increase the rents they charge.

The moves are designed to offset the hit from a major tax overhaul being phased in from April, which will stop landlords from deducting mortgage interest from their tax bill. Instead, they will assessed for a tax rate based on their gross income, including rent, and then receive a 20 per cent rebate. 

This will see more landlords become higher-rate taxpayers - and their tax bills will double. It has been said that investors in low-margin areas could even pay taxes despite making annual losses.

However, anyone holding properties in a limited company structure will be unaffected as mortgage interest will remain tax deductible and the corporate tax rate is a flat 20 per cent, falling to 17 per cent in the next five years.

According to research compiled by Kent Reliance building society, "in the first nine months of this year, 100,000 limited company loans were taken out by landlords buying properties… double the number for all of 2015".

A survey of 900 landlords found 11 per cent, the equivalent of up to 200,000 across the country, have either incorporated in this way or transferred property to a family member in a lower tax bracket, says The Times.

In addition, up to 25 per cent, 500,000 landlords, are looking to incorporate in the future.

"The bad news for tenants is that landlords are also considering raising rents to make up for lost income," says the Guardian, which reports an average 5.4 per cent increase could be on the way. Rents are now at a record average of £881 a month.

However, several experts have cast doubt on the incorporation plans. 

"You cannot just transfer a property into a company. You have to sell it to the company and that could trigger other costs," David Hollingworth, of mortgage broker London & Country, said.

He added that landlords would have to think about "how you will get your income out of the company", together with costs and administration complications over keeping and filing company accounts.

Will the government change course on buy-to-let clampdown?

21 November

Over the past two years the landscape for buy-to-let investors has changed dramatically - and now some reports suggest as many now one-in-four landlords are selling up.

So, has the buy-to-let bubble burst, and did the government pop it?

What has happened?

It started last year when the then Chancellor George Osborne announced an end to buy-to-let tax relief.

At the moment landlords can deduct all of their mortgage interest costs from their rental income before calculating their tax bill. Starting next April a new rule will gradually be phased in that stops landlords from being able to do this.

“This is different from and more damaging than a simple tax hike,” says Olivia Rudgard in The Telegraph. “In practice it means that landlords who were previously breaking even, or making a loss, will now have to pay tax on income that they don’t have.”

Under the new rule a landlord's tax bill will be worked out based on their gross income, including rent. Instead of deducting interest they will subsequently receive a flat-rate 20 per cent tax credit.

So basic-rate taxpayers will not be too hard hit – but more landlords will be classed as higher-rate taxpayers. The tax bill for those in the higher tax brackets will at least double and, as it will be set before mortgage costs factored in, some people could make a loss and still pay tax.

Is that all?

No. To add to landlords' woes, the Bank of England has announced that it wants lenders to more carefully assess affordability when deciding whether or not to approve a buy-to-let mortgage application.

If a landlord has four or more properties their entire property portfolio will be assessed during the application. In reality this means many lenders could stop offering loans to these people as the admin costs will be too high, says Ray Boulger, a technical manager at mortgage broker John Charcol.

The change in stance from the Bank of England’s Prudential Regulation Authority (PRA) is a knock-on result of the government’s tax change as costs will rise for landlords and there are concerns it could mean they fall into mortgage arrears.

In practice the reduced competition and higher admin could mean new buy-to-let buyers face higher rates of interest on loans – and existing owners could see bills increase when they refinance.

Let's not forget there's also since April been a three per cent stamp duty surcharge for investment buyers – and a maintenance allowance has been scrapped, meaning instead of getting 10 per cent tax relief on rental costs, only specific expenses can be claimed.

What does it mean for landlords?

As a result of the measures, one in four landlords have sold, or are planning to sell their rental properties, a survey by the Residential Landlords’ Association (RLA) has found.

The RLA also say that two thirds of landlords were expecting their profitability to fall by at least 20 per cent, and 14 per cent expected their profits to drop by over 60 per cent as a result of the tax changes.

A survey by Martin & Co, a letting and property management business, has found that 92 per cent of landlords believe the Government is ‘anti-landlord’.

“All landlords I speak to feel battered and let down by the current government,” says buy-to-let investor Phil Stewardson in The Telegraph. “There seems to be a constant attack as they try to appease anti-landlord sentiment.”

What about tenants?

It isn’t just buy-to-let investors who could suffer as a result of the new rules. People living in rented accommodation are in for tough times too: rents in Britain are already at record highs but many landlords are planning to increase them in order to help cover their higher costs.

Also, if landlords start selling up the reduction in rental properties may mean rents rise too.

There is “potential trouble ahead for tenants,” says David Smith, RLA’s policy director. “Any reduction in supply is going to make it more difficult for them to find a place to live and will inevitably drive rents up.”

Will the government change course?

If it believes the changes will affect tenants it might, as an increasing number of families are renting due to high house prices and this would fit with its new drive of targeting support at "just about managing"households.

But otherwise landlords are likely to get little sympathy. Those who have built up large asset wealth on the back of soaring house prices and low rates are not being courted right now, as Theresa May instead focuses on the so-called "left behind" who have seen their wealth decline.

There is also still a belief among many that by reducing the number of buy-to-let investors buying property, overall demand will reduce and that will help to moderate high prices to make them more affordable.

Multi-property buy-to-let owners face squeeze

11 November

Several news reports today have highlighted another strand of the government and Bank of England's clampdown on the buy-to-let sector.

It's a change that went largely unnoticed in a policy statement from the Prudential Regulation Authority in September, but will hit those with an existing portfolio of investment properties.

Under new rules coming into effect in September 2017, financial institutions offering loans on new buy-to-let property to anyone with four or more properties will have to assess all their portfolio, says the Financial Times.

In part, the move is because "mortgage arrears rates are higher when landlords own more properties", says the paper, which adds to risks in what is already seen as an overheated segment of the market.

Ray Boulger, the technical manager at mortgage broker John Charcol, said the change will mean fewer loans being offered to multi-property owners as the additional resources involved will make it unprofitable for the lender.

Wither few loans around, interest rates for landlords with larger portfolios could be increased by "a quarter or half percentage point".

The change is also in part because tax relief changes coming over the coming years "might put landlords under water on some of their properties", adds the FT. 

However, some experts believe it will not have too big of an impact as the buy-to-let market is filled with specialist lenders, such as Paragon and Aldermore

Steve Olejnik, of Mortgages for Business, told the Daily Mail there are "plenty of specialist buy-to-let lenders with robust underwriting standards already and their processes are likely to change very little".

In addition, the new Bank of England rules will mean lenders are required to "stress test" loans at interest rates of 5.5 per cent and ensure rental cover on mortgage repayments of at least 125 per cent. 

Some are already asking for higher rental cover of 145 per cent.

According to an FT calculator, on an average two-bed home in Dartford, Kent, currently costing £270,000 and worth £996 a month in rent, this higher rate would limit the loan size to £150,000.

After the change, a landlord would need to stump up equity of £120,000 to buy the property, in addition to hefty second-home stamp duty of £11,600 and other buying costs.

Lloyds subsidiary ups buy-to-let barriers

9 November

A subsidiary of Lloyds Banking Group has given the latest signal of the squeeze to come on buy-to-let borrowers after announcing a change to its lending terms.

Birmingham Midshires is upping the rental cover from the standard industry rate of 125 per cent on new loans to borrowers in the higher and upper-rate tax band, says the Daily Telegraph.

Under changes coming into force over the next three years, landlords will no longer be able to offset all of the mortgage interest, which until now can make up 100 per cent of monthly repayments, against their tax bills.

Instead, their bills will be based on gross rental income, minus a flat-rate 20 per cent rebate on the mortgage interest.

The change means more buy-to-let investors will find themselves in higher-rate tax brackets, where the effective bill will be double. Under the new rules, tax will even be payable on those making an annual loss on their investment.

To ensure loans are sustainable, the Bank of England has encouraged banks to set a higher rate of rental cover, which refers to the amount of rent payable relative to the mortgage repayments.

Earlier this year, Barclays and Nationwide subsidiary the Mortgage Works increased their minimum rental cover rates from 125 per cent to 135 and 145 per cent respectively after a separate tax change increased the upfront levy for those buying an investment property.

"Birmingham Midshires is the first to introduce a different system depending on a borrower's tax band," says the Telegraph. It has not given details, but merely stated that "from the end of the year" rates will be set based on "individual circumstances".

Some say the changes will hurt hard-pressed tenants, who will see rents increase sharply.

But the idea is that with market rates preventing rents from being increased too much, the new rules will force borrowers to put in more of their own cash to reduce the value of the mortgage, thereby restricting lending in the market.


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