A survey of close to 300 professional landlords, carried out in November, revealed a drop in the number of landlords who expected to be affected by the changes to tax relief.
Some 60% of respondents felt that they would be directly affected by income tax relief changes, down from 64% in May, while 29% said they would not be affected, up from 23%. Of those surveyed, 11% said they did not know how the changes would impact them.
From April 2017, reductions in tax relief will be phased in over a period of four years. The end result will be a restriction in the amount of income tax relief landlords can receive, which will be reduced to the basic rate of tax.
David Whittaker, chief executive of Mortgages for Business, the commissioners of the research, said: “The percentages feel about right for the market in general and it’s certainly been a tough 18 months or so for landlords, so it’s encouraging to learn that the majority are getting to grips with changes that will dramatically alter the way they operate.
“We are still encouraging landlords who haven’t already taken professional advice on the matter to do so as soon as possible, as some may find that the new formula will tip them into the next tax bracket leaving them worse off. The new regime starts in April, so there’s not much time left to make strategic decisions and take action.”
Lender reactions to the new Prudential Regulation Authority (PRA) guidelines on buy-to-let lending have followed a similar pattern. The PRA has stipulated that all buy-to-let lenders must use an interest rate of 5.5% in their interest coverage ratio (ICR) calculations, instead of the pay rate of the mortgage. Additionally, lenders must take into consideration the reduction in landlords’ income as a result of the lower tax relief. This consideration has seen most lenders raise their ICR percentages to 145% from 125%.
Some 60% of respondents said they understood how these changes would affect the amount they could borrow. A further 25% said they partially understood the implications of the PRA guidelines.
Despite the potential squeeze on profits and loan sizes, professional landlords remain optimistic. The proportion of those seeking to expand their portfolios in the next six months has risen to 45%, up from 41% in May. The proportion seeking to shrink their portfolios has fallen further to just 9%, down from 14% in May.
Landlords with the largest portfolios are most likely to offload properties, with 31% of landlords among those with 21 or more properties seeking to sell in the next six months. Similarly, expansion is most popular with landlords possessing two or three properties with 55% of landlords in this category listing this as their goal.
Five-year fixed rate mortgages were found to be the most popular product type overall with 34% of respondents expressing a preference for this category of loan, a return to form after falling popularity in previous surveys.
Whittaker said this was clear evidence that lenders’ focus on competitive pricing of five-year fixed rates had been successful in attracting landlords keen to maintain some certainty of cash flow following a year of economic turbulence and growing speculation that interest rates and inflation will rise this year.