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

Government moves against buy-to-let investing 'will drive rents up by a fifth'

4 November

Government efforts to dampen the buy-to-let market will result in constrained supply that will send rental prices soaring by as much as a fifth over the next five years, says a leading estate agents.

Savills predicts house prices could "flatline" next year as a result of Brexit uncertainty and prices are likely to increase by just 13 per cent cumulatively by 2021. 

But the estate agents forecast that increased demand for properties to let, partly driven by reduced transaction volumes and an ongoing affordability squeeze for first-time buyers, could boost rents by as much as 19 per cent.

Fellow estate agent JLL agrees, predicting rental prices will rise by an average of 18 per cent.

Such forecasts aren't only concerned with the inability of tenants to get on the housing ladder, they also blame the tumbling number of buy-to-let investors and the resulting squeeze on rental property supply.

A stamp duty surcharge on second home owners introduced in April added three per cent to the upfront tax charge for people buying investment property. A blanket ten per cent maintenance charge that could be deducted from annual income tax has also been scrapped.

Added tot that, by the end of this parliament, landlords who do not own their property portfolio through a company structure will lose the right to offset their mortgage interest from their tax bill.

The tax bracket will be based on gross income, including rental revenue, with a 20 per cent rebate. This will double the effective tax rate for higher-rate taxpayers, while in some cases, the increase will be steeper still.

The theory is that fewer prospective landlords will now buy property and so fewer homes will be made available for rent, conseqently driving up prices. This will be worse in areas where house prices already squeeze rental yields.

Efforts to dampen the buy-to-let market are pushing investors towards "higher yielding, lower demand markets", Lucian Cook, of Savills, told the Financial Times.

This means "areas of highest demand, such as London, face tightening supply", the paper adds. "Yields in cheaper areas of the country tend to be higher."

Evidence in recent months suggests the buy-to-let sector is bouncing back despite the punitive tax reforms. Property portal Rightmove revealed enquiries from would-be investors rose by 30 per cent between June and September.

Buy-to-let sector bounces back after tax hit

12 October

Reports of the death of the buy-to-let sector may have been greatly exaggerated.

Purchases by prospective landlords crashed in April in the wake of a major rise in stamp duty on second homes. Looming tax changes over the next few years will wipe out the profits for many second-home owners, experts warn.

Despite this the industry is "staging a fight back against government efforts to rein it in", says the Financial Times.

The property portal Rightmove has revealed that enquiries on its website from would-be investors rose by 30 per cent between June and September. It says that the number of new properties being offered for rent rose six per cent nationally and 15 per cent in London during this period.

This is good news for tenants in the capital, who have seen their rental prices drop by 0.7 per cent. Rents across the country as a whole rose only modestly by 0.5 per cent during the third quarter, according to Rightmove.

Landlords have been hit with an unprecedented wave of tax changes, including the three per cent rise in stamp duty from April. From this year, owners have also been unable to claim their flat-rate 10 per cent "wear and tear" tax deduction and instead must claim for specific expenses.

Most controversially, by 2020 home owners will no longer be able to deduct mortgage interest from their tax bills, which will send costs spiralling higher.

Some 700 landlords have launched a legal challenge against that rule change, saying it undermines the principles of commercial taxation. But their judicial review bid was thrown out last week.

Sam Mitchell, Rightmove head of lettings, said: "Investor activity has bounced back following the stamp duty changes, though some agents report that many investors are looking to knock sellers down on their asking prices to make up for the additional stamp duty they now need to pay."

Overseas investor interest in the UK property market also appears to be bouncing back, says the Daily Telegraph, spurred by the pound slump.

Juwai, a Chinese property listings website, says that buyer enquiries on British property climbed by 12 per cent in September alone. This is 90 per cent higher than the same month last year.

Regulator warns of another buy-to-let clampdown

11 August

Another buy-to-let clampdown could be coming, this time relating to smaller, non-bank lenders.

Sky News says the Financial Conduct Authority's (FCA) director of retail lending, Philip Salter, has contacted firms that lend to prospective landlords but are too small to come under the range of the Bank of England's Prudential Regulation Authority (PRA).

In a letter, he warned the FCA was considering intervening in the market, which has been booming in recent years.

Under a "twin peaks" regulatory structure that came into force in 2013, the Bank of England, through the PRA, has taken back responsibility for overseeing the main lending activities of large banks and building societies.

Alongside this, the FCA keeps a check on all aspects of financial firms' conduct, including how banks deal with their customers, and solo-regulates smaller firms, including non-bank lenders.

In March, the PRA published proposals to tighten up on buy-to-let, which it fears represents a systemic risk to the property market. This included affordability checks for borrowers based on a "stressed" base interest rate of 5.5 per cent.

However, these rules, which are set to be confirmed in September, would not automatically apply to FCA-regulated lenders. Buy-to-let loans also escape most of the authority's consumer credit regulations.

"There is a risk that poor standards of lending could emerge in firms that would not be subject to the PRA's proposals," Salter told the lenders. "We will actively monitor the non-bank lending sector of the BTL market to ascertain whether we need to intervene to advance our operational objectives."

Trade bodies for landlords have complained that the sector has come under siege thanks to a range of onerous tax changes and a change in attitude from banks, which have already begun to apply more stringent criteria in relation to rental cover.

From next year, a significant change will see tax relief on mortgage interest phased out, which will double the tax bill for higher-rate taxpayers and push some landlords into annual losses.

Banks step back from buy-to-let after Brexit

13 July

Banks and building societies are expected to curb buy-to-let lending in the aftermath of the vote for Brexit, according to one of the UK's most senior regulators.

Richard Sharp, an external member of the Bank of England's financial policy committee, told MPs on the Treasury select committee yesterday that buy-to-let lending would probably "cool significantly" in the coming months, reports the Daily Telegraph.

"I suspect the banks will want to see what regime we're in in terms of house prices before they go back to aggressive lending," he said.

Bank of England governor Mark Carney warned during his evidence to the committee, which is investigating the fallout from the EU referendum, that even though central bank action could prevent a credit crunch, it was not a "silver bullet" and that demand for loans depended on the economy.

The comments are the latest to predict banks will take a more circumspect view of buy-to-let in the months and years ahead, primarily due to changes to the way landlords are taxed.

Under new recommendations from the financial policy committee, prospective landlords will need to ensure their rental income offers greater cover on their borrowing. Barclays, TSB and Nationwide have already implemented a proposal for rental income to provide 145 per cent mortgage cover.

To get the loan down to a sufficient level based on current rents, crowd-funding website Property Partner says minimum buy-to-let deposits could rise to 60 per cent in some areas, the Telegraph reports.

Buy-to-let borrowing has fallen sharply following the increase in stamp duty on second homes from April.

Council for Mortgage Lenders figures show buy-to-let issuance in May was around half of what it was in the same month last year, says FTAdviser, remaining around 85 per cent down on the bumper sums borrowed in March to beat the stamp-duty hike.

Buy-to-let in spectacular rise and fall either side of stamp duty hike

15 June

Buy-to-let investment rose dramatically in the first three months of this year as prospective landlords rushed to beat a stamp duty hike – and then fell away just as spectacularly afterwards.

According to Bank of England statistics published yesterday, buy-to-let purchases accounted for £13.5bn of loans between January and March, accounting for 21 per cent of the market overall and up more than 75 per cent on the same period in 2015, the Daily Telegraph notes. 

As a result, landlords outstripped the borrowing of first-time buyers for the first time since early 2008, at the height of the "credit crunch". The period saw new purchasers take out £10.8bn worth of mortgages, up 25 per cent year-on-year. 

However, lending to landlords seemingly collapsed in April, say figures from the Council for Mortgage Lenders (CML). 

The Belfast Telegraph reports that 4,200 loans with a combined value of £600m were handed out in April to those purchasing buy-to-let properties, down more than 85 per cent on March and around half of the levels seen in April 2015.

CML director general Paul Smee said: "There is a sense of calm after the storm... We expect the market to take several months to return to its previous levels after the lending surge."

Sitting in the middle of these wildly divergent trends was the introduction of a stamp duty surcharge of three per cent on second homes, which came into force on 1 April and hikes the upfront levy due on a £250,000 house from £2,500 to £10,000.

With a further clampdown on the relief landlords can claim on mortgage interest and maintenance costs coming from next year, is this now the beginning of the end of buy-to-let?

Colin Bell, at Hampshire Trust Bank, does not think so. Rising house prices are holding back increasing numbers of first-time buyers, he told the Telegraph, so landlords will continue to borrow more. Meanwhile, younger households show an increasing cultural trend towards renting.

Others also believe the demand will remain high while low interest rates reduce the returns available from mainstream assets. In addition, it's thought the crackdown will simply lead to higher rental costs for already hard-pressed tenants. 

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