Buy-to-let market would be cooling anyway, but there is hope for the future – Shawbrook

The number of BTL mortgages for house purchases has fallen sharply in the last two years, while record low interest rates continue to support the number of re-mortgages taken out, as landlords shop around for the best possible deal.

Shawbrook commissioned independent research looking at three main policy changes in detail:

• the introduction of a 3% stamp duty surcharge on second homes in April 2016,
• the gradual phasing out of the tax deductibility of mortgage interest payments starting in 2017,
• tightening of mortgage underwriting standards following a consultation by the Bank of England’s Prudential Regulation Authority.

Cooling effects from residential market

The report’s findings strongly suggest that the substantial changes in the tax code, as well as the tightening of underwriting standards, have contributed to the decrease in BTL mortgages taken out.

That being said, we believe a cooling of the market would have happened regardless as the BTL sector is closely linked to the wider housing market.

This is facing more tepid price growth and a regional decrease in transaction levels, especially in areas where affordability ratios are stretched such as London.

Nevertheless, transaction levels have been noticeably lower since the introduction of the stamp duty surcharge.

The change in mortgage interest tax relief will make BTL investments for a large number of private investors less profitable, an effect that still has to fully play out as the tax relief is withdrawn gradually over the coming years.

Further evidence from a landlord survey commissioned by UK Finance shows more than half the landlords who plan to sell-up their rental homes within the next five years cited the changes in stamp duty, mortgage tax relief and wear and tear allowance as a reason for doing so.

Positive long-term impact

Given a generally weaker housing market and the numerous government interventions the data indicate that transaction levels will fall to around 57,500 by 2023.

While the effect on overall house prices should be rather small, we would expect yields to be higher compared to a scenario where the tax changes were not implemented, given that the lack of housing supply generated by BTL landlords should drive up rents.

The good news is that the so called professionalisation of the sector and more sustainable lending practices are likely to have positive effects in the long run – a trend that should benefit brokers operating in the specialist space.

Given that the private rental sector (PRS) will play an increasingly important role in the UK’s tenancy mix, there is still a market for landlords with a sustainable business plan and a good understanding of the legal and tax implications.

Looking ahead, we expect the professionalisation of the sector to continue and BTL investors should carefully consider the latest changes in taxation when evaluating their next steps, drawing upon the advice of specialists where appropriate.

Resilient market

Additionally, the regional focus of the sector is shifting.

With its larger demand for PRS housing, London has long dominated the BTL sector.

But a flat housing market and limited capacity for rental growth in the capital means that other places in the country offer better yields to investors, especially cities with large student populations.

Brexit adds a further layer of uncertainty but importantly, this space remains a resilient one with opportunity both for savvy investors, and for brokers with an appetite to support this community. With everyone on the same page in terms of cementing sustainability and supporting the market with education and awareness of regulatory and government-led change, the future – although challenging – still appears bright.