The prisoner landlords trapped in buy-to-let deals
Tax and regulatory changes are eating into profits and hitting investment
Buy-to-let landlords in the UK are grappling with a raft of tax and regulatory changes that are threatening profit margins and discouraging investment purchases in the sector.
Investment in the sector dropped by 80 per cent from £25bn in 2015 to £5bn in 2017, according to recent figures from the Intermediary Mortgage Lenders Association. While many investors are sitting tight, others are selling up under the pressure of the tax changes.
“Although it is hard to say how much is down to policy changes, they are clearly the key factor stunting investment,” says the IMLA, which represents UK mortgage lenders.
The sharpest brakes on buy-to-let came in 2015 and 2016 at the hands of government ministers and regulators who feared that buy-to-let’s growing share of UK residential mortgage borrowing might exacerbate any instability in prices, should owners be tempted to sell into a falling market.
First, landlords were barred from being able to claim higher rate tax relief on mortgage interest. The phasing of the relief’s withdrawal, over four years to 2020, last month passed its halfway milestone; by 2020, it will be reduced to a 20 per cent tax credit. Calculations by the IMLA found that buy-to-let higher rate taxpayers with a loan-to-value mortgage of 75 per cent at an interest rate of 4 per cent can no longer expect to make a profit in any region of the UK.
“For the worst affected landlords — those in the higher or further rate tax band depending entirely on rental income with high borrowings — the need to sell off some properties may be all but inevitable,” the report said in February.
A second headwind has been the introduction from April 2016 of a 3 percentage point surcharge in stamp duty land tax on those buying to let or purchasing a second home. On a £500,000 home, that doubled the duty to £30,000. Landlord investors rushed to buy ahead of the deadline, causing a surge and subsequent drop in sales.
The Prudential Regulation Authority at the Bank of England also imposed constraints on buy-to-let, demanding that lenders assess affordability based on an interest rate of at least 5.5 per cent and a ratio of property rental income to mortgage interest of at least 125 per cent, prompting many lenders to raise this benchmark ratio to 145 per cent.
Landlords with more than three properties also found themselves working under new rules last year: the PRA said lenders would have to assess any new purchases they made not just on the viability of the new property but their portfolio as a whole. Several lenders decided to withdraw from the “four or more” market in light of the new requirement.
Of all the tax changes and other measures brought in over the past three years, more than half of landlords say the loss of this mortgage interest tax relief has had the greatest impact, according to a survey this month by Shawbrook Bank, a lender to buy-to-let borrowers.
Close to a fifth of landlords are planning to sell up part or all of their portfolios
Property market experts have warned that the measure is creating new “buy-to-let mortgage prisoners” — those who took out loans in a looser lending climate and find that they no longer pass lenders’ affordability tests. Unable to refinance their mortgages on competitive terms, they may find themselves charged a higher “reversion rate”, further exacerbating their problems with the viability of their portfolio.
Some have a sort of immunity to the changes in mortgage interest tax relief by owning homes through limited companies rather than as individuals. Mortgage lenders have reported a rise in the number of loans to limited company landlords; they also expanded the number of mortgage deals available to them, according to website Moneyfacts.
The limited company route has not solved landlords’ problems, however. A transfer from an individual ownership model to a corporate vehicle may trigger an upfront capital gains charge, while Charlotte Nelson of Moneyfacts warns limited company borrowers typically face higher interest rates than other buy-to-let investors. The average rate for a two-year fixed rate buy-to-let mortgage on offer to limited company applicants now stands at 4.29 per cent, compared with 3 per cent for the rest of the market, she says.
Some argue the risks and rewards for buy-to-let investors should be measured over decades — a time period over which things look considerably more positive. Research from Kent Reliance, a specialist mortgage lender, found a “typical” landlord would see a net profit of at least £265,500 per property over the next 25 years through rental income and capital gains, even after costs and taxes were taken into account.
Many landlords, however, may not be able to wait that long. The Shawbrook survey found close to a fifth of landlords were planning to sell up part or all of their portfolios as a result of the UK’s tax and regulatory onslaught.
Source: FT | Originally published on: 21/05/2018 | See the original post on FT