The budget brought bad news for buy-to-let landlords on Wednesday, as the Chancellor announced the tax break for mortgage interest payments would be gradually restricted to 20%.
While this change means that basic rate tax paying landlords are safe, Ray Boulger, senior technical manager at John Charcol (pictured), explained that lenders would also have customers witnessing a significant impact on their overall costs.
“Lenders will have to balance keeping their rental calculation simple, coupled with perhaps changing it, or requiring a higher level of cover for higher rate tax payers. However, it seems rather counter intuitive to offer a higher mortgage for any given rental income to borrowers with a lower earned income,” he said.
Gradual withdrawal of the higher rate of tax relief will begin in April 2017 over a four year period, which Boulger said meant it was unlikely higher rate taxpayers would rush to sell their buy to lets, but would still want to re-evaluate the value of their investment.
“As the budget makes buy to let less attractive for these (higher rate) taxpayers, and indeed those who expect to shortly move into that tax bracket, the inevitable effect will be to reduce the supply of rental properties,” he added.
“To avoid rents rising to reflect this lower supply other investors will need to fill the void and one possibility is institutional investors. In particular Legal & General has said it plans to expand its investments in this sector.”
Director of LettingFocus.com, David Lawrenson, said it was possible that the budget changes would only scale back purchases to a nominal degree, with landlords increasing spending on maintenance of their properties to get a lower rate of tax.
“For some, a company limited structure will be worth considering (though many mortgage lenders still cannot seem to understand the demand for this and have no products in place),” Lawrenson said.
“And, also, if they can, landlords will surely look to shift the ownership over to a spouse who may enjoy a lower rate of tax.”
He added: “The big pension funds who want a piece of the private rented sector action will be unaffected by this. So there may be much clapping and cheering among the “kindly” pension funds, big overseas investors and the other big boys, as their small “pesky and nasty” landlord competitors just got clobbered whilst they are thrown the keys to the private rent hen house. Expect more of this kind of thing going forward.”
