Investing in buy-to-let properties has been considered as a solid investment plan. Tax and regulatory changes that have been introduced over the last couple of years has led some landlords to question the viability of buy-to-let properties. In this article, we look at the factors that have caused this change and ask if the buy-to-let market can recover to the heady heights it once experienced.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Slump in the buy-to-let market
The buy-to-let market has experienced a big slump this year. Data from the Council of Mortgage Lenders shows that the number of buy-to-let purchases is nearly half of what it was the previous year. It has been averaging around 6,000 purchases per month, over the last 12 months.
This has led the Council of Mortgage Lenders to reassess its forecast for buy-to-let borrowing for 2017/18. The organisation expected to see £38 billion for 2017 and 2018. This has been reduced to £35 billion for 2017 and £33 billion for 2018.
Reasons for the slump
Tax reforms
The reduce in buy-to-let lending can be laid at the feet of the ex-chancellor, George Osbourne. He introduced plans to add an extra 3% on Stamp Duty Land Tax for second properties from April 2016.
The market saw a massive jump in the number of applications for buy-to-let mortgages in early 2016, as landlords rushed to get their purchases finalised. Data by the Council of Mortgage Lenders showed that transactions in March 2016 peaked at 29.100, this has since stabilised at an average of 6,000 per month.
This tax change was followed by another announcement that all rental income will be treated as taxable income and not as profit. This policy is being phased in over 4 years from April this year. This has been described as the policy that will ‘kill’ off the buy to let market. Due to the tapering structure, its full effect on the market will not be known for many years.
Reduce in returns
Figures released by YourMove shows that rental returns have dropped drastically in the last year. On average landlords in England and Wales can expect to see returns of 4.4% this down from 5% the previous year.
This average varies region to region, and data shows that landlords in London receive the lowest rental return in the country, of 3.2%.
This with the stabilising growth in house prices has led some landlords to cut back on their plans to increase their property portfolios.
Regulatory changes
Since January, the Prudential Regulation Authority (PRA) has required lenders to undertake interest coverage ratio tests and interest rate stress tests.
The tests are used by lenders to see if the landlord can achieve a sufficient rental income to cover the cost of the mortgage payments, even if interest rates increase by as much as 5%.
What does the future hold?
The changes to stamp duty, the reduction in rental returns and the rules introduced by the PRA have led to a reduction in the number of buy-to-let purchases. It has also made landlords relook at the way they structure their property portfolios.
Experts predict that the buy-to-let market will never recover to what it was, but emphasise that it is not the end of the market.
Property is still seen as a ‘solid investment’. Increasing number of landlords are enquiring about transferring their property portfolios into limited companies. In response, lenders are offering more products that are suited to this structure.
Need a buy to let mortgage?
If you are planning to invest in a buy to let property, ensure you have the best mortgage. Speak to Chris about your options and to get a competitive, independent quote:
Tel: 01403 780 770