Martin Stewart, managing director of mortgage broker London Money, explains what he thinks
Landlords have enjoyed a good run since 1995, but there’s a new sheriff in town and he doesn’t seem so keen on their business model. Changes to second home stamp duty and the gradual reduction in buy-to-let (BTL) tax relief could be about to bring an end to the heyday of BTL investment. In short, the wheels are falling off the BTL bandwagon.
Tax relief on BTL mortgage interest payments was one of the more attractive aspects of BTL, particularly to those looking at property investments as an alternative to pensions. Relief was calculated at a property owner’s marginal rate of tax, meaning that a basic rate taxpayer would get 20% tax relief while top-rate tax payers could claim up to 45%, making their rental income much more lucrative.
Over the next five years, all that will change. By 2021, tax relief will be capped at a flat rate of 20%; that’s up to 25% relief lost to higher rate tax payers. Under the new conditions, higher-rate tax payers are set to see their rental profits plunge. Nationwide Building Society estimate that a landlord with a £150,000 mortgage on a £200,000 property, and a monthly rent of £800, could see profits drop from £2,160 a year to just £960 – and that’s one of the less gloomy predictions.
This change will affect almost everyone with a BTL mortgage and those looking to get a foot on the property investment ladder. Yes, some landlords with larger portfolios may be OK, but these legislative changes will polarise the market, marking a clear divide between those who can make the figures work and those who can’t. We’ll be saying ‘ta-ra’ to the latter for sure, but no landlord can assume they will be fine. Further regulatory changes to BTL are always afoot, and whilst landlords might dodge the crosshairs this time, in future they may not be so lucky.
What can landlords do to protect themselves from significant profit loss under the new terms? The obvious answer is to sell, and therein lies one of the great unknowns of Osbourne’s policy. We’ve seen portfolios of 30 properties which would need to be trimmed by a whopping 30% to retain their profit. Multiply that by the huge number of landlords on higher-rate tax, and the result could be an awful lot of properties flooding the market in the near future.
Going forward, a BTL property in London is going to become very difficult to make viable, unless purchasers borrow at 60% LTV. The upshot of this is that the rental sector will eventually become a market of well capitalised, sensible and prudent landlords helping to keep a much needed private rental market ticking over.
Unfortunately, financial advisors can do little to help potential or existing landlords deal with the new legislation. It’s likely that the ‘new normal’ will see individuals approaching their accountants long before they start peering into estate agent’s windows, as – after that conversation – BTL may have lost some of its lustre. What we can do is discuss possible alternatives to buying an investment property or ways to finance what they hope to buy
As we’ve said before, BTL should never be viewed in isolation, but as part of a much bigger financial planning strategy. Even with these changes BTL will still be right for some, just not for others. So you need to understand the difference between what you want and what you need as you’ll be needing a plan for both. Remember, too, that when Osbourne talks about austerity what he really means is that the train has run out of gravy; so don’t expect a helping hand from him along the way.