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Threats looming for Landlords?
There appear to be multiple threats looming for landlords at the moment.
In July the Chancellor George Osborne announced that he is “levelling the playing field” between residential and buy-to-let property owners by phasing in a reduction on the tax relief traditionally enjoyed by buy to let mortgagees so that by 2020 relief will be restricted to just the basic rate of tax.
One consequence of this proposal is that some basic rate tax payers may be pulled into the higher rate tax bracket because of the change in the way that tax will be calculated. Currently “total income” is calculated by adding the difference between rental income and mortgage interest paid but under the new rules the total rental income will be added to other income first and then the basic rate of tax deducted from the total tax bill. According to the Residential Landlords Association around 60% of basic rate buy to let mortgagees expect that the change will push them into the higher tax bracket.
Osborne also broadcast his intention to remove the automatic tax relief currently enjoyed by landlords of furnished properties who can claim against a percentage of the rent for “wear and tear” irrespective of the amount actually spent. This will be replaced by new rules under which only the amount legitimately spent can be claimed against tax relief.
Bank of England Powers
Osborne also now appears to be on the cusp of granting new powers to the Bank of England to regulate the buy to let mortgage market.
Speaking to the October meeting of the treasury select committee Osborne “let slip” that the Bank’s financial policy committee will be granted powers to make it harder for landlords to obtain mortgages. Although there are no specific details yet available it seems probable that the curbs will be similar to those introduced for residential home loans at the end of 2014. Those changes introduced strict affordability rules and restricted the maximum multiple of income that could be borrowed.
The Bank has been concerned for some time that the “hot” buy to let market is putting the wider economy at risk and now after several months of persistent lobbying it seems that its wish for greater powers and controls is about to be granted.
Threats and Opportunities
So in the face of these threats looming for landlords how worried should they be?
Tackling the tax changes first – for those higher rate tax paying landlords who finance their investments through a buy to let mortgage the tapering down of tax relief will have an increasingly negative impact on their financial yield and by 2020 when fully implemented their net income may even halve in some cases.
To mitigate the impact of this landlords are likely to seek higher rents. How high the increases can go will depend on the normal market influences of supply and demand but as long as there continues to be a shortage of affordable housing it is likely that demand for privately rented accommodation will continue to grow. Unless the government legislates to impose a maximum cap on rental levels (which cannot be ruled out – Osborne has already meddled in the social sector by imposing a reduction in social rents) then there is a good opportunity for rents to rise in line with demand.
Increased Bank Powers
The size of the threat resulting from the increased powers to the Bank of England will depend largely on the detailed proposals. Provided that the Bank use their new powers only to ensure that landlords act in a financially prudent manner by not taking on debt that they cannot reasonably afford then the market is likely to be generally supportive. Indeed financially strong landlords may find greater opportunities as their financially less well placed competitors are forced from the market.
There are however concerns in some quarters that the Bank will abuse their powers by attempting to artificially “cool down” the market by introducing unreasonable and unnecessarily restrictive measures which will unfairly hamper landlords attempts to gain finance.
A further threat looming for landlords is the inevitability of an increase in interest rates leading to increased mortgage costs. With the Bank of England’s base rate having been held at 0.5% since March 2009 many investors have been enjoying a large surplus of income on their buy to let investments but it is certain that rates will rise at some time in the future with a negative impact on that surplus. When they rise and by how much remains the great unknown but many prudent landlords have taken and continue to take the opportunity to select one of the many good fixed rate mortgage deals which are still available.
Not all landlords are of course dependent on mortgage lending – indeed latest estimates suggest that around two-thirds purchase with cash.
Another factor that should be borne in mind is that most landlords are assuming (or at least hoping) that their investments will secure a long term capital gain as the purchase value of their properties increases. So yet one further threat is declining market values – as the return on rental yields decreases so the need for strong capital growth correspondingly increases. Once more market forces will dictate but again as long as the dearth of affordable housing continues it is likely that price pressure will remain upward rather than otherwise.
These are turbulent times for landlords and of course individual circumstances will dictate individual actions but in a financial world riddled with uncertainties the consensus is that buying and letting property will remain a viable opportunity for some time to come.