A rise in stamp duty and harder lending criteria are part of measures to cool the buy-to-let property boom before it collapses.
Landlords have been targeted by increased taxes and the removal of tax breaks but their difficulties don’t end there as the Bank of England plans to intervene and slow the buy-to-let market further.
The Bank of England’s Prudential Regulation Authority (PRA) has stated it wants buy-to-let property buyers to face tougher limits on how much they can borrow as part of a study on changes to landlord lending.
Generally when applying for a buy-to-let mortgage, lenders look for a rental cover of 125% at an interest rate of 5%. Put simply, the rent has to be 125% of the mortgage. They do not consider the personal financial circumstances of the borrower.
This would change under the PRA’s suggestions which would force lenders to look at all the costs a landlord would would be liable for when renting out a property, including any tax liability, and to verify the landlord’s personal income.
The PRA has also recommended that lenders stress test landlord borrowing against higher interest rate rises to ensure they could afford to repay the mortgage if interest rates rose 2% over a five-year period from the start of the mortgage.
The research has been published following fears that a buy-to-let boom is causing the housing market to overheat and the PRA said the new regulations would ‘curtail inappropriate lending and the potential for excessive credit losses’.
Mark Carney, Bank of England governor, voiced concern last year that the buy-to-let market in the UK could create market instability and that landlords would be exposed to large falls in house prices.
The government has already taken measures to try to curb the boom in buy-to-let lending with announcements in the 2015 Budget and in this year’s Budget.
From April 2016, those buying second properties will face an extra 3% stamp duty and from April 2017, mortgage interest relief will be lowered. Under the four-year withdrawal of the relief, which allows buy-to-let landlords to offset their mortgage interest, in 2017/18 landlords will be allowed to apply the existing relief rules to 75% of their finance costs and the remaining 25% using the basic rate reduction.
The following three years will see the proportion change to 50:50, then 25:75 before the basic rate applies in full from 2020/21.
This year, landlords were hit again as profit made from the sale of second properties was excluded from a capital gains tax (CGT) cut. CGT has been reduced from 18% to 10% for basic rate taxpayers and from 28% to 20% for higher rate taxpayers, however the chancellor George Osborne stated in this Budget speech that ‘the old rates will be kept in place for gains on residential property’.
Many commentators believe the stamp duty increase will hit rental yields and draw more landlords into paying the tax.
Landlords with houses in London and the South East will need the most time to recoup the cost of stamp duty hikes, on average 20 months.
In 13% of the country, landlords will pay stamp duty for the first time ever, as the zero rate for properties up to £125,000 will no longer apply and a 3% charge will apply – costing the buyer up to £3,750.
Landlords in Darlington, Halifax and Doncaster will be among the strongly affected as they will pay stamp duty for the first time and because they have the lowest average rents, it will take longer to recoup.
Market observers said the measures to curb the buy-to-let market could affect tenants, property vendors and other borrowers more than landlords. The thinking is that landlords are still going to do this business, but they will negotiate a better deal with the seller and if their cost base goes up they will pass that on to the tenant.
There is also a concern that cutting out landlords in a bid to ‘redistribute property’ could mean fewer properties are built.
If you are considering a buy-to-let investment, speak to Frost Financial today and let one of our friendly advisers discuss how the changes could affect you.