What’s Happened to Buy to Let?


Three measures are coming into force which may negatively affect the Buy to Let (BTL) market for private landlords.

The first has already happened with the introduction of the additional 3% Stamp Duty on second homes from April 2016. This led to a mini boom in BTL activity in the first quarter of 2016 as investors rushed to beat the change. Our experience locally was a large increase in activity in the first quarter followed by a 60% reduction in BTL mortgage valuations from April to June.

Secondly, from the next tax year (2017/18), the tightening of the tax regime for loan interest deductions is likely to impact the market further over the following 3-4 years. For landlords in the higher tax brackets and with higher Loans to Value the impact can be significant with current
profits potentially turning to losses on an on-going basis. Those landlords whose strategy is to look to make small annual profits but long term capital gains may find themselves having to re-think their criteria. There may also be increased pressure on rents as landlord’s attempt to maintain the profitability of their investments. There has been some anecdotal evidence that BTL investors are looking at corporate structures to reduce their tax bills but at present there is a more limited market for competitive Corporate BTL loans.

The third measure is the introduction of more stringent lending criteria for BTL borrowers by some lenders. Historically most lenders have required rents to cover 125% of mortgage payments and used interest rates typically of 5% to stress test this affordability. The Council of Mortgage Lenders have reported that some lenders have already moved to 145% interest cover with a mortgage stress rate of 5.5%. This is likely to require increased rents and/or increased equity in order to make investments viable.

The measures above are likely to slow the growth in the BTL market and may lead to more price volatility, particularly at the lower end. There may also be an increase in larger “professional” corporate landlords moving in to replace the smaller private landlords. It remains to be seen whether this has any impact on rents and/or changes the ratio of owner occupiers to renters.

This entry was posted on 14th October 2016. Bookmark the permalink.