At the beginning of the month, a leading lettings agent claimed that demand for new investment in buy-to-let is at the lowest level it has ever been. Not only are there fewer new people entering the market, there is a distinct and alarming trend of existing BTL landlords selling their properties. Fourth quarter lending on loans and mortgages for BTL was 38% but the trend ahead of the completion of the first quarter of 2017 shows an alarming drop. Why is this the case? Several issues have been put forward.
Phasing out of Tax Relief
The major cause of this slowdown in the BTL market is that tax relief on landlord finance is being phased out from the new financial year (starting 6th April 2017). This will reduce the tax relief to the basic rate of income tax. The percentage finance costs deductible will reduce in 25% increments from April 2017, with 75% this year reducing each year to 0% for the financial year 2020-2021. The changes will not stop there, either. Further changes will be introduced over the next four years that are affecting BTL market confidence.
Bank of England’s Increased Power
The BoE Financial Policy Committee was recently granted extra powers over the BTL market. It is expected that more property investors – either new or existing – will find it much more difficult to get mortgages to buy property. Now, that division of the BoE will conduct more thorough and stringent affordability tests before permitting the sale of a large loan such as a mortgage for the purpose of BTL. It will reduce the number of landlords, affect those with the smallest incomes and discourage new investors.
Increased Stamp Duty
The government has also imposed an extra 3% stamp duty for BTL landlords and second homeowners on top of the regular stamp duty. This could affect long-term investment in the sector. Landlords and their representative groups are now at loggerheads with a government determined to free up some properties for purchase for family homes. This will also include buildings presently being adapted for residential dwellings – former churches, factories and warehouses upgraded and adapted into apartment blocks, for example.
Is there a Brexit Effect?
It’s too early to know whether and what changes the vote to leave the European Union will have. Much will depend on the type of deal that the United Kingdom gets from the European Union at the end of the two-year negotiation period. What is clear is that there has been a drop in investor confidence right across the board, especially with several drops in the value of the pound since the June 2016 referendum. Confidence can affect a market, creating a glut of properties as people attempt to offload properties before their value drops.