B
uy to let has become one of
the hottest investment areas:
mortgages to landlords
accounted for about 17% of all
new lending in 2015, according
to the Council of Mortgage Lenders, up
from 12% in the first half of 2008. Buy-to-
let lending is also growing faster than other
areas, with the value of loans agreed in the
first three quarters of 2015 up almost 50%
on the same period in 2014, compared with
an increase of just 5.3% for loans to
owner-occupiers over the same period.
But two changes in tax legislation
announced last year will have a significant
impact on the buy-to-let market. Existing or
potential investors in the sector should
therefore take the opportunity to review
their exposure and consider whether it is
still an appropriate asset.
The popularity of buy to let is partly a
result of government policies across the
developed market to engineer recovery from
the financial crisis. Interest rates have been at
a record low of 0.5% since March 2009 as
policymakers have struggled to boost
lending and economic growth, making cash a
very poor investment but borrowing very
cheap. Investors have sought safety by buying
gilts and blue chip bonds, so their prices
have risen sharply, while yields, which move
inversely to prices, have fallen. Quantitative
easing has increased liquidity and pushed the
prices of many assets higher, including
residential property.Add to the mix the
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THE INVESTOR
the changing shape
of buy tolet
An investment favourite
of recent years may be
less attractive, due to new
legislation and uncertainty
over interest rates
ByAnthony Hilton
of investment, with challenges ranging from
the difficulty of finding reliable tenants to the
amount of time it takes to buy and sell;
prospective investors should carefully
consider the risks before entering, or
increasing investment in, the market.
Indeed, the Bank of England’s (BoE)
Financial Policy Committee has highlighted
the sector as a potential risk to the economy
as a whole:‘As the market continues to
grow, particularly if driven by loosening
underwriting standards, the sector could
pose risks to broader financial stability,
both through credit risk to banks and
the amplification of movements in the
housing market.’
The tax changes could have a significant
impact. Currently, tax relief on the interest
on mortgages used to buy rental property is
available at the highest marginal rate, but
fromApril 2017, that will gradually be
reduced until, by 2020, relief will be
restricted to 20%. For anyone who is paying
tax at the highest rate of 55% and funding a
buy-to-let property with an interest-only
mortgage, the effective financing cost will
rise from 45% of the interest charge to 80%
within four years.
Estate agent Knight Frank warns:
‘Removing higher rate tax relief on buy-to-
let mortgage interest payments will affect
the returns for many property investors.
Given that interest rates are also predicted
to gradually move upwards from this year,
some buy-to-let property owners, especially
housing shortage that has dogged the UK
market for years and it is no surprise that
house prices have been so buoyant, with the
price for an average house up 38% over the
past 10 years, according to the Halifax
House Price Index.
Buy-to-let investors have been further
encouraged by rising rents, as the housing
shortage and market recovery have priced
younger buyers out of the market, forcing
them into rented homes.The Buy-to-Let
Index compiled by LSL Property Services
Removing higher rate
tax relief will affect
the returns for many
property investors
IN YOUR INTEREST
shows that rents have risen by almost a
quarter over the past five years, making the
returns available elsewhere look lacklustre.
But in buy to let, as in any other area of
investment, there is no such thing as a risk-free
return.Tax changes made in last year’s Budget
and again in the 2015Autumn Statement
have significantly altered the economics of the
industry; an interest rate rise is on the horizon,
which will also push up mortgage rates and
make financing buy-to-let properties more
expensive. Buy to let is also a demanding area
