Buy-to-let investing is going to become much more expensive as a result of a number of tax clampdowns and soon it might be even harder for landlords to get a mortgage in the first place.
At the end of March, the Bank of England’s Prudential Regulation Authority proposed new rules to clamp down on buy-to-let mortgages. This action came after concerns that the buy-to-let market is spiraling out of control. Recently, demand for properties from buyers reached its highest level in years.
However, these new regulations are likely to prevent one in every five loans that are currently issued. At the moment, most buy-to-let activities don’t need to be formally regulated by the Financial Conduct Authority and lenders typically only compare mortgage repayments against future rental income.
On 1st April, a new stamp duty land tax surcharge came into force, also targeting prospective private landlords and adding a massive 3% to the tax bill for those seeking to buy investment homes. Ahead of the 1st April deadline, buy-to-let activity increased significantly, pushing house prices to a record new high in the process. The average UK house price has now exceeded £200,000 for the first time.
Will all of this work and why is this action being taken?
The government is concerned that first-time buyers are finding it very hard to get onto the property ladder, with private landlords having a competitive advantage. They are all bidding for the same properties, but landlords are able to offset mortgage costs, at a time when rental demand is pushing up potential income.
As potential new homeowners are increasingly forced to rent, this raises demand and fuels a vicious cycle. By removing a lot of the tax benefits and hitting landlords with higher initial costs, the government is hoping that this demand will decrease, easing the pressure on prices and allowing first-time buyers the opportunity to get into the housing market.
The worry is that this will limit the supply of rental housing in an already squeezed market and that it could add to the financial burden on younger people trying to get on the property ladder, with landlords simply resorting to increasing their rents.
We believe that younger buyers may still find themselves in an impossible situation, unable to find a way into the housing market and squeezed out of the increasingly high rental market.
There is certainly a problem with house prices in this country, but maybe the only way to fix that is (in an ideal world) to build more homes, ease planning restrictions and restore interest rates back to realistic levels to deal with speculative demand.
In the meantime, those landlords who are concerned because their mortgage won’t match up to their rental income should consider putting property guardians into their empty buildings, as this will give them some revenue through the licence fee paid by guardians and will reduce their insurance costs while the building is occupied.