Buy-to-let lenders face longer-term pain
07-15-2015
Tax changes in the Budget could be a major blow to specialist lenders, analysts warn
July Budget 2015 George Osborne with the red box - for the second time this year
Chancellor George Osborne cut tax relief for high-earning landlords in the emergency Budget Photo: David Rose/The Daily Telegraph
By Tim Wallace
Limits on tax relief for landlords could be a serious blow to specialist buy-to-let lenders, analysts at Barclays warned, as the changes in the emergency Budget undermine some investors' income.
Banks such as Paragon and OneSavings bank will also end up being hit by the new 8pc additional tax on profits that Chancellor George Osborne has decided to levy on the sector.
The buy-to-let sector has seen a strong surge in activity this year, even leading to warnings from the Bank of England that volatility in the industry could lead to growing risks to financial stability.
Mr Osborne's tax changes limit the tax relief landlords can gain from the interest payments on their buy-to-let mortgages. Previously they could set the cost off against their entire income tax bill. Now that relief will be reduced to the basic income tax rate of 20pc, so higher earners who pay 40pc or more will pay more tax on their rental income.
Barclays analyst Daniel Garrod said the tax changes could reverse some of this when they are phased in from April 2017.
"Potentially this move could significantly reduce the post-tax income a landlord can make from their buy-to-let activity. This could have negative consequences for buy-to-let lenders such as OneSavings Bank and Paragon in our coverage," he said. "The reduced tax incentive for operating as a buy-to-let landlord could cause significant reductions in buy-to-let mortgage volumes, which year-to-date are up 23pc year-on-year."
That damage comes on top of the additional corporation tax hike, which had already led Barclays to cut its average earnings per share forecast for the specialist loan sector by six pc.
OneSavings Bank's shares dived by more than 10pc on the Budget changes, but have since climbed back to cut the total loss over the past week to 4pc, and its chief is confident in its long-term fortunes.
"The sheer demand and demographic growth prospects for private rented property are likely to keep the market growing despite these small changes to the tax regime," said chief executive Andy Golding.
Paragon Bank agreed: “With strong and growing rental demand we do not see these changes as having a material impact on demand for buy-to-let mortgages but we will keep a close eye on the developments. Today, one-in-five households in England rely on the private rented sector as their home and demand from tenants is expected to remain high for the foreseeable future. As such, landlords are likely to continue to see the benefits of making further investments in the sector."
Barclays' Mr Garrod also noted that incorporated landlords, who form the majority of the customer base of the banks affected, will be hit less hard by the changes.
Meanwhile, mortgage brokers said that landlords seeking capital gains from the property investments will not be put off by the changes.
"For long-term investors in buy-to-let properties, income is a by-product, it is a nice to have as opposed to a reason to go into buy-to-let," said Jeremy Duncombe from the Legal and General Mortgage Club.
"It has not affected lenders' calculations. It is really whether from an income point of view the transaction is still the right one. And if there is a slight drop in income for landlords, there is a small likelihood that rents could be affected."