Is buy-to-let a disaster waiting to happen?
11-24-2015
Michael Trudeau
House with noose
Over-optimistic buy-to-let (BTL) investors may be walking unknowingly into a 'disaster waiting to happen'.
Wealth manager Brewin Dolphin found that four out of five BTL investors appear to be 'blissfully unaware' of tax changes that could hit the income they currently enjoy from their properties.
Residential BTL landlords could see their rental incomes reduced when the maximum amount of tax relief they can claim on mortgage interest falls from the current 45 per cent top level of tax to the basic rate of 20 per cent. The new policy will be phased in from April 2017, and completely implemented in 2020.
'The UK's love for property is insatiable, amplifying the risk for buy-to-let investors,' says Rob Burgeman, divisional director at Brewin Dolphin.
FALSE SENSE OF SECURITY
'As property values have increased over the years, we have been lulled into a false sense of security. With the chancellor's tax relief changes, the harsh new reality hasn't yet sunk in for investors: the buy-to-let market is a disaster waiting to happen.'
He adds that landlords are finding it difficult to comprehend the fact that they will be prevented from deducting mortgage interest, which is an expense, from their profits (as they do at the moment), and will instead be given a 20 per cent tax credit on their eventual tax bill.
'For higher-rate taxpayers this means effectively paying tax on mortgage interest, in addition to the interest itself. For many people, this just doesn't make sense.'
Although he thinks 'disaster waiting to happen' is a bit strong, Savills' director of residential research Lucien Cook agrees that landlords are set to feel the squeeze.
'On average they will see the amount of cash generated shrink,' he says. 'The people with high gearing or with very low yields and moderate gearing will struggle to make sums add up when it comes to 2020.'
He adds however that out of the entire private BTL universe, only 30 per cent of properties have a BTL mortgage attached to them, and the average loan-to-value is 54 per cent.
According to the Association of Residential Letting Agents (ARLA), rent growth slowed in October, with only a quarter of agents reporting rent increases - down from a third in September. However, demand continued to increase apace in London.
In its November issue, Money Observer identified BTL as one of five financial 'disasters waiting to happen'.
NEW LANDLORDS COULD BE DISCOURGED
'A lot is resting on the economic and political agenda,' says David Cox, managing director of ARLA. 'We're still waiting for new houses, promised by the prime minister, to be built.
'While this will take pressure off the rental prices as supply rises, the changes to landlord tax proposed under the Finance Bill is likely to discourage new landlords from entering the market.'