First came the tax blows, then the EU referendum decision. Now lenders are raising the bar for buy-to-let investors, in anticipation of tighter regulation. Are there any good reasons left to invest in residential property?
By the time the country delivered its EU vote, Britain’s buy-to-let market was already reeling from the twin lightning bolts of tax changes announced by the government.
It remains to be seen whether an EU exit represents a third strike to the sector, or if it will prove to be merely a temporary cloud of confusion.
The housing market as a whole saw noticeable effects from a slowdown in sales, particularly in London and the south-east, in the run-up to the referendum and in the immediate aftermath.
For example, the UK’s biggest estate agent, Countrywide, reported a 25% fall in pre-tax profits for the six months to June, and said continuing uncertainty meant it would not match last year’s results.1
However, initial fears of a steep fall in values have subsided. Indeed, Nationwide reported a slight rise of 0.5% in UK house prices in July, while noting that this was data from the mortgage offer stage, which might pre-date the referendum.2 The building society warned that it might take months for the effects of the EU exit vote to become clear.
All that can be stated with confidence is that there is no evidence yet of a dramatic effect from the EU exit. According to Fiona Haggett, UK Valuation Director for the Royal Institution of Chartered Surveyors: “The post-referendum impact appears to have been muted, with buyers and sellers acting cautiously rather than in a panic.”
Richard Donnell, Research and Insight Director at residential property market specialist Hometrack, sees a clear north-south divide at present.
“The further from London you go, the more resilient the housing market seems to be,” he says. “You can still buy in London, but only if you take a long-term view and you’re happy to take a low yield and put a lot of equity in.”
The changes to mortgage interest relief and stamp duty, announced by then Chancellor George Osborne last year, remain of more immediate significance to the buy-to-let market.
The imposition of an extra 3% on stamp duty for buy-to-let or second home purchases, which took effect in April, had a predictable dampening effect on purchases.
After a last-minute rush on properties in March, buy-to-let lending dipped abruptly in April, which registered the lowest number of loans since June 2014, according to the Council of Mortgage Lenders.3
The mortgage relief change is scheduled to happen over a longer term. At present, all mortgage interest can be offset against income at the marginal tax rate. By 2020/21, landlords in higher tax bands will no longer receive tax relief at 40% and 45%, but at the lower 20% rate.
The suggestion by new Chancellor Philip Hammond that the Autumn Statement might be an opportunity to “reset” fiscal policy if necessary has offered landlords some hope of reprieve.
However, even the Residential Landlords Association (RLA), which is campaigning against the move, is not expecting a full reversal of the policy. It is seeking to minimise the impact on established landlords by asking that the change be limited to new borrowing only.
The RLA believes that more landlords will be affected by the change than the Treasury predicts, because tax will in future be applied to turnover rather than profit.
In the association’s survey of almost 1,200 landlords,4 over 60% of those currently paying the basic rate of income tax said that the changes would push them into a higher tax rate, even though their incomes had not increased. It believes the changes will push some landlords to leave the market, further squeezing the availability of rented housing.
That view is not confined to those with a direct interest in the buy-to-let scene. The Institute for Fiscal Studies’ Paul Johnson has pointed out that rental property is taxed more heavily than owner-occupied homes.5
In a response to the mortgage relief change, he said: “There is a big problem in the property market making it difficult for young people to buy, and pushing up rents. The problem is a lack of supply. This change will not solve that problem.”
And there’s one further blow that will act as a new deterrent to some investors. The Prudential Regulation Authority (PRA) has just closed a consultation on its recommendation for more stringent financial checks on buy-to-let mortgage applicants.
The PRA expects that its proposals, if implemented, would cut the number of new approvals for buy-to-let mortgages by between 10 and 20% by the third quarter of 2018.6
Some lenders have already acted in anticipation of the change being made, hiking up their ‘rental cover requirements’ – the sum a landlord needs to take in rent compared to the mortgage repayment – to 145%.
Hometrack has analysed the likely effect. Richard Donnell sees it as having potentially greater impact than the stamp duty hike.
“If everyone had to buy two-bed properties against 145% interest cover, investors across the higher-value, lower-yield parts of the country would have to stump up some decent amounts of equity – more than 10% of the purchase price in some places,” he says. “Again, it bites hardest in London and the south-east.” Despite the disincentives, Donnell remains positive about the relative attractiveness of buy-to-let for investors in an era of low interest rates.
“There is still a case for buying property as an investment,” he says. “There will still be buyers, but I personally think we are going to see a steady slowing in the momentum and volume of sales.”
1 Countrywide H1 interim financial report, July 2016:
2 Nationwide House Price Index, July 2016:
3 Council for Mortgage Lenders press release, June 2016:
4 RLA survey, September 2015:
5 IFS post-Budget briefing, June 2015:
6 PRA, Underwriting standards for buy-to-let mortgage contracts, March 2016:
Forecasts are opinion only, cannot be guaranteed and should not be relied upon when making investment decisions. The forecast of future performance is not a reliable guide to actual future results. The value of investments may fall as well as rise. Any views expressed by Lloyds Bank Private Banking are our current in house views as at 1st August 2016 and should not be relied upon as fact and could be proved wrong. Views expressed are not intended to provide legal, tax or financial advice.
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