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 could become a 'wealthy person's game'

20 May

New guidelines for mortgage lending criteria before tougher tax rules come into force next year could make buy-to-let investing a "wealthy person's game" in the years to come, according to one expert.

Simon Collins of broker John Charcol was speaking to the Daily Telegraph in the wake of a decision by 'big four' bank Barclays to increase the "minimum rental cover" for landlord loans. Rent will now need to be 145 per cent of mortgage costs, compared to a previous 135 per cent.

The change could encourage prospective landlords to increase rental costs – a likely prospect given the tax rises coming in next year – but in practice will also make it harder for wannabe investors to secure a loan. Nationwide's specialist buy-to-let arm, the Mortgage Works, upped its own minimum rental cover from 125 to 145 per cent last week.

As of next year, tax changes will come into force that will reduce the tax relief on mortgage interest for private landlords. The effect will be both to double the annual tax bill for higher-rate taxpayers and to push more investment homeowners out of the basic rate bracket, leaving many nursing annual losses.

"In London and the south-east especially, a lot of people who weren't necessarily rich or wealthy were doing buy-to-let because they didn't understand pensions, and saw property as a safe, tangible asset, said Collins. "Let to buy – where homeowners rent out their main home to raise cash to move – was very, very popular, and the people doing it were not wealthy people."

Barclays says that as a "responsible lender" it must "ensure that aspiring landlords can continue to meet all their financial commitments and are protected".

Tougher lending criteria could also be introduced in a move to head off new rules on the sector from the Bank of England, which has launched a consultation on proposals designed to force banks to take into account a wider range of fees when assessing buy-to-let mortgage affordability.

Earlier this week the BoE released a research paper that claims the tax changes next year, coming after a tax duty surcharge this April, would not prevent continued demand for buy-to-let property as investors anticipate "positive expectations of rental growth in the years ahead".

Will buy-to-let tax changes push rents up more?

13 May

A major tax assault on the buy-to-let sector due to be ramped up next April could make it even harder for already squeezed tenants to get by financially, according to one housing academic.

Kath Scanlon of the London School of Economics told the Daily Telegraph it is "not clear what the government wants these policies to accomplish".

"They seem to reflect the public unpopularity of landlords, who are easy objects of blame for the current situation in the housing market, especially in London… Shrinking the sector does not seem sensible given what we know about unmet demand and need," said Scanlon, who has published a report on the issue along with colleagues Christine Whitehead and Peter Williams.

"It is said that tenants cannot pay more than they already are – yet a lot of sitting tenants have not had recent rent increases," she added. "That may change."

Scanlon argues that the real enemy of housing affordability is lack of adequate supply and that without a huge increase in building, buying a home will remain unaffordable and the number of people being forced to rent will rise. In this context, the squeeze on private landlords will only threaten supply further and almost certainly drive up already high rental costs.

So far, the government has introduced a three per cent stamp duty surcharge on new investment purchases and excluded landlords from a cut to capital gains taxes. From next year, cuts to mortgage interest relief will double the tax paid annually by landlords paying higher rate tax – but these cuts will also drag more landlords into upper tax brackets.

Such reforms will hit the yield on landlords' properties and, it is hoped, cool the rampant demand for buy-to-let investments. They could also result in many landlords selling their second homes, thereby increasing the supply of houses for sale. This should help to moderate house price growth, making it easier for renters to become first-time buyers instead.

But landlords will feel squeezed if they keep rents largely unchanged, rather than raising them to cover lost income. If market forces alone are not able to contain price rises, political intervention may be needed.

That is precisely what the new Mayor of London has pledged. Sadiq Khan wants to introduce a London living rent, which would require the support of the government and be set in each area at a third of local average earnings, with increases indexed to inflation.

The Financial Times reckons that at least larger developers will not be as opposed to such a scheme as might be assumed. There is evidence from similar schemes in Germany and New York that certainty over rent increases is useful to investors and encourages tenants to stay on for longer. This reduces other expenses such as the opportunity cost of a property standing empty.

Buy-to-let property returns are rising - but maybe not for long

11 May

Is it any wonder that buy-to-let investing has proved to be so popular in Britain?

At a time when cash savings are generating next-to-no interest and the stock market is extremely volatile, property investors have been enjoying stellar returns.

The latest figures from the Property Partner Residential Market Index show that private landlords made an average paper profit of 9.6 per cent last year. During this same period, cash Isas were offering at most 1.4 per cent and the stock market lost nearly four per cent, according to The Guardian.

Landlords with an investment property in London fared even better, earning 16.5 per cent, while even the worst performing north-east region offered a return of 2.6 per cent.

Over the past two decades, buy-to-let property has generated an average total return of 24.3 per cent a year in the capital and almost 15 per cent annually across the UK.

Given the potential gains, it is no surprise investors rushed to beat the introduction of a stamp duty surcharge on second homes at the beginning of April.

Council for Mortgage Lender figures, quoted in the Financial Times, reveal that there were 162,000 property purchases in March (typically the figure is more like 100,000). The number of buy-to-let purchases surged by 180 per cent, while cash buyers, a disproportionate number of whom are investment buyers, rose by 80 per cent.

This rush to buy might begin to change very soon, Property Partner predicts. It says the restrictions coming in on mortgage interest relief for landlords, which will double the annual tax bill for higher-rate taxpayers and push more people out of lower-rate bands, are likely to drive many buy-to-let property owners into annual losses.

The firm, which is promoting its own crowdfunding buy-to-let platform as an alternative for wannabe investors, argues that the majority of profit is a result of increases in property value rather than rental income.

For mortgage holders there was on average no rental return, the firm says, but with a lower equity outlay the paper return was higher overall at 27 per cent last year.

Relying on house prices for a return might be less lucrative for first-time buy-to-let investors. There is a growing feeling that house prices in the UK and especially London might have reached their peak in recent years and that a period of more modest growth could be ahead.

Will buy-to-let clampdown work?

01 April

"Short of attacking them with flame-throwers, or impaling them on stakes, it is hard to know what else the Bank and the government can throw at landlords," writes Matthew Lynn in the Daily Telegraph.

Today a new stamp duty land tax surcharge that is targeted at prospective private landlords comes into force, adding a hefty three per cent to the up-front tax bill facing those buying investment homes. In an effort to avoid the charge, a stampede of buy-to-let investors has ramped up activity in the property market in recent months, pushing house prices to a fresh record in the process.

That's not all. From next year rules that allow landlords to offset all of their mortgage interest against their tax bill will be phased out, which means that by the end of the decade higher-rate tax payers will get half the relief they do now. And then this week the Bank of England proposed new rules to make it harder for landlords to get a mortgage, which could prevent one in five loans being issued.  

Will all of this work? Well, first of all you need to separate the objectives of the government and the Bank of England clampdowns.

Tax hits

The government is concerned that first-time and younger buyers are finding it tough to get into the housing market and that private landlords have a competitive advantage. They are bidding for the same properties but are able to offset mortgage costs at a time when rental demand is driving up potential income.

As more would-be new homeowners are forced to rent this increases demand and fuels a vicious cycle, the theory goes. By removing a lot of the tax benefit and hitting landlords with higher initial costs it is hoped this demand will cool, easing the pressure on prices and levelling the playing field for first-timers.

Some fear all this will limit the supply of rental housing in an already squeezed market – and that it could add to the financial burden on younger households as landlords will simply increase rents. Only time will tell, but if the latter comes to pass expect to see calls for the sort of rent controls advocated by former Labour leader Ed Miliband at the last election.

Lending controls

As for the Bank of England, it is concerned with financial stability. In short: it is worried that the huge demand for buy-to-let property represents a bubble and that if there were to be an economic shock landlords might abandon the market en masse, causing a painful crash that would be felt across the economy.

So it wants to make it harder to get a loan and to get rid of the practice of basing lending decisions simply on whether or not mortgage interest is covered by rental income, as it is now. Money Observer notes, for example, that the current system does not prevent purchases by those who will make a loss on their investment and are thus higher risk.

That's all relatively sound in principle. The problem, critics argue, is that this is unlikely to stop the rampant demand from investors starved of yield elsewhere and, as above, that it could serve to limit the already scarce housing supply.

"There is certainly a problem with house prices in this country," concludes Lynn. "But the only way to fix that is to build a lot more homes, free up planning restrictions and raise interest rates back to realistic levels to choke off speculative demand."

Tough new rules to cut one in five buy-to-let loans

30 March

Buy-to-let investing is already about to become significantly more expensive as a result of successive tax clampdowns - and now it might become harder to get a mortgage in the first place.

Yesterday, the Bank of England's Prudential Regulation Authority published proposals for new rules to set a higher bar for borrowing by prospective landlords.

If agreed, the regulations could prevent one in five loans that are currently issued, Andrew Bailey, a deputy governor at the bank, told the Daily Telegraph.

At the moment, most buy-to-let activities do not need to be formally regulated by the Financial Conduct Authority and lenders typically only undertake loose assessments comparing mortgage repayments against future rental income. 

The new tests would be more akin to the stringent affordability assessments that have applied for residential mortgages since 2014. Banks would be required to investigate borrowers' wider finances, including tax liabilities, broader costs associated with the property, other sources of income and living expenses, notes the BBC

Tougher "stress tests" on future interest rates could also require banks to model borrowing costs forward five years. ITV News says affordability may have to be assessed against a long-term average interest rate of 5.5 per cent, even if "the stress tests indicate a lower rate".

Finally, observing "an increase in observed arrears rates of landlords with buy-to-let portfolios of four or more" properties, any such landlord would be considered a "portfolio landlord" and be subjected to an even stricter assessment.

Bailey told the Telegraph the rules were designed to prevent "very volatile boom and bust conditions" in UK housing, as demands surges at a time of low interest and retirement income rates. 

He added that any "crash" in UK housing as a result of lending becoming out of control would in particular hit older people who have invested large sums of their retirement savings into property.

The proposals come ahead of a stamp duty hike that adds three per cent to up-front taxes paid by prospective landlords from Friday while from next year, rules will be phased in that also limit the amount of mortgage interest relief available to buy-to-let borrowers.

Furthermore, from 2019, landlords must pay capital gains tax due on property sales within 30 days rather than at the end of the year.

At the Budget earlier this month, George Osborne reduced the rate of capital gains tax by eight per cent but pointedly excluded those that own investment homes, who are left paying what has dubbed a "capital gains tax surcharge".

Buy-to-let sector hits out over capital gains tax changes

17 March

Buy-to-let homeowners and lobby groups have reacted furiously to what they see as another attack from the Chancellor in the form of a "capital gains tax surcharge" in yesterday's Budget.

The language is incendiary: there was no new tax or surcharge introduced. But private landlords were pointedly excluded from a surprise and steep drop in capital gains taxes, meaning they will pay eight per cent more on any uplift in the value of their assets than other investors.

Along with a range of tax cuts aimed at small businesses, entrepreneurs and savers, the tax, paid on realised gains on investments, was reduced from 18 to ten per cent for basic rate taxpayers and from 28 to 20 per cent for those in the higher rate bracket or above.

Sales of residential property are excluded, however, and existing rates will continue to apply.

To boot, a consultation on a three per cent hike in stamp duties for buyers of second homes this April revealed the government had rejected an earlier proposal to include a waiver for those buying more than 15 properties, the Daily Mail notes. The exemption will apply on a parallel introduction of the tax in Scotland.

The waiver is designed to prevent a hit on those supporting an increase in the UK housing stock, but the government said existing incentives for new build properties were sufficient - and it is concerned that individual landlords might club together in limited companies to buy big blocks of property.

"This is now the third budget which directly attacks landlords," David Cox, the managing director of the Association of Residential Letting Agents, told The Guardian.

"The sector has been punitively taxed, with stamp duty on buy-to-let properties, mortgage interest relief and now capital gains tax changes. It's an outright assault on the sector."

James Ward, partner and head of private client at law firm Seddons, added: "Once again the Chancellor has demonstrated his quite clear disdain for people making money out of the property market."                             

Osborne's range of tax hits on buy-to-let investors, which include an overhaul of mortgage interest relief from 2017 that will halve the break offered to higher-rate taxpayers, is designed to remove a competitive advantage enjoyed by investors over first-time buyers. Some hope it will also encourage more landlords to sell, increasing the availability of property and tempering house price rises.

Buy-to-let investors flocking to beat tax rises

11 March

More evidence has emerged that buy-to-let investors are dashing to beat tax rises coming their way this April and in the remaining years of this parliament.

According to the latest figures from the Council of Mortgage Lenders, there was a 22 per cent surge in the number of home purchase loans issued to prospective private landlords in January, to 9,500. Moreover the total amount borrowed rocketed 40 per cent to £1.4bn, says The Guardian, reflecting also-increasing purchase prices.

Investment buyers have been flocking to complete their property purchase by the end of this month to avoid the three per cent stamp duty surcharge coming in for second homes at the beginning of April. The policy change was introduced at the Autumn Statement at the end of the November and in the months since, every housing index has noted a huge uptick in buy-to-let activity.

But the stamp duty change is not the only hit coming down the road for landlords. From April 2017, new rules will be phased in that will remove the right to claim tax relief on mortgage interest, which will be replaced with a flat-rate payout that halves the tax break offered to higher-rate taxpayers. More landlords that nominally pay basic-rate taxes now could fall into a higher tax bracket.

It has been reported that, as a result, there was an increase in the number of people setting up limited companies to house property. The Financial Times quotes Steve Olejnik, the sales director at buy-to-let broker Mortgages for Business, saying the proportion of applications from corporate vehicles has surged from 18 per cent to "well over 50 per cent" in the past six months.

The FT said this was related to the hike in stamp duty as it "applies only to homes bought by individuals". That is not actually true – the increased levy applies to all second home purchases, even those transacted by a company structure – but it is certainly the case that corporate entities will remain able to offset mortgage interest against their tax bill as a business expense.

Of course, investors need to consider if setting up a company structure would also add costs, for example, through typically higher mortgage rates applicable to businesses buying property. And if you're thinking of moving an existing portfolio into a new holding company, it would have to "buy" the properties and that could incur a hefty capital gains tax bill.

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