Buy-to-let investors face new restrictions on borrowing after the Bank of England’s financial committee warned that the buy-to-let market posed a growing risk to the UK’s financial stability. The buy-to-let market is being blamed for pushing up house prices and stopping first time buyers from getting their first foot on the property ladder. We’ve all heard this before.
Buy-to-let lending has risen by 40% over the past 7 years which is roughly twenty times faster than lending to owner occupiers. Considering the current returns on other investments I don’t think that is a particularly surprising number.
The 2 million buy-to-let landlords in the UK currently own just under 5 million properties. That represents about 18% of all UK homes. The government are unhappy that buy-to-let investors get tax relief on their mortgage interest (their tax rules not ours) whilst owner occupiers do not.
Buy-To-Let Investors will no longer be able to claim full tax relief on interest from April 2017.
As I reported in last month’s newsletter, the full tax benefit currently available to buy-to-let investors is to be phased out and from April 2017 will no longer be available. The impact of this change on current profitable property portfolios is massive – as letters from angry members clearly demonstrates. Many profitable buy-to-let property portfolios will suddenly become a financial liability. If you haven’t got round to crunching the numbers on your buy-to-let portfolio I recommend you do so immediately with the help of your accountant. It will affect every landlord differently.
The average net yield on UK buy-to-let investor properties is currently only 2-3% so this is a very delicately balanced market.
Meanwhile, landlords still live in fear of the threat of rising interest rates. Probably the only good thing about the recent fall in the value of the Chinese stock market is that it has put back the increase in interest rates that the Governor of the Bank of England was hinting at, only two months ago. Over in the US however Janet Yellen, Chair of the Federal Reserve is still telling the markets that an increase in base rates is due at the end of the year.
The BOE want to make it more difficult for Buy-To-Let investors to borrow money.
And the pain continues.
The bank of England also want to impose restrictions on the the mortgages available to landlords looking to finance new properties. Last year they wanted to impose maximum loan to value ratios that are more strict than the current rules making it more difficult for landlords to finance new deals.
Is there anything a buy-to-let investor can do other than selling up? I suggested that the most likely result of these changes is that landlords will simply put up the rent. It’s fair to say that the change in the tax rules only affects those with a large mortgage more than anyone else but that is still a large percentage of the market. landlords have proven themselves to be a tough breed who see property as a long term investment. I don’t foresee a massive selling up in the near future.
Landlords with a buy-to-let portfolio may consider setting up a limited company in order to continue to benefit from the mortgage interest relief. A company currently pays 20% on any gains (which will drop to 18% in 2020) but there are downsides to this. To draw money out of the company you have to take a taxable dividend. You will also need to consider the capital gains and inheritance tax implications as well as the costs of setting up the company in the first place.
Shortage of property remains the key to buy-to-let investors’ strength.
Britain needs around 250,000 new homes every year just to keep pace with the increase in the population. We are now where near that figure. In 2014 only 140,000 new properties were built despite endless new target coming from hot-air politicians. With the shortage of new properties coming onto the market I expect rental prices to increase in order to finance any government attempts to cool the buy-to-let market. I think the market can bear those increases – and I suspect the government knows that too.
In reality, the government do not seem to have the appetite to address the problem of too few houses being built each year – but they cannot wait to impose yet another tax on the very people who are satisfying the ever increasing rental market. It’s just an easy way to get more money from buy-to-let investors without actually calling it a tax.