What now for Buy to Let Mortgages & Stamp Duty

We asked Steve Bolt, Mortgage Advisor of Vivid Financial Services for his thoughts on the Chancellor's Autumn Statement and buy to let and stamp duty changes on second homes.  Here is what he thinks:

"If I was a buy-to-let landlord at the moment I’d feel like I’d been attacked by the Dynamic Duo themselves.

No, not Bruce Wayne and his side-kick Dick Grayson aka Batman & Robin, but the Governor of the Bank of England, Mark Carney and his side-kick at the Treasury, the Chancellor of the Exchequer George Osborne.

The beating started back in July, when tax changes were announced as part of the George’s Summer Budget. I’m no accountant but the key points are that by 2020, tax relief on buy to let borrowing will be set at 20% across the board, regardless of the landlord’s marginal tax rate.

This will not affect basic rate (20%) taxpayers, but will limit the claims for mortgage interest relief for the rest to 20% - cutting relief in half for higher rate taxpayers and by 25% for additional rate taxpayers. The 10% Wear and Tear Allowance for furnished buy to let landlords also goes out the window.

Painful enough, but not a killer blow from the Red Box. However the Autumn Statement brought more misery when last Wednesday the next punch was landed, this time in the shape of a 3% Stamp Duty rise for all Buy to Let properties and second homes.

Increased Rents for Tenants

Whilst adding a few £’s into the Chancellors coffers, the affect of this will surely be that rents increase, as landlords seek to re-coup this additional cost. Even the Institute for Fiscal Studies found the increase hard to justify as it would punish renters over homeowners by pushing up costs.

However, in addition to pushing up purchase costs if you are brave enough to be considering adding to your residential property portfolio, then I suggest you give your solicitor a decent bottle of claret for Christmas.

I'm predicting that it's likely that the conveyancing system comes close to meltdown as solicitors come under massive pressure to complete before the deadline of 31^st March 2016, especially when this coincides with the Easter break, a traditionally very busy time for the housing market as many purchasers seek to complete before the holidays.

Avoiding the Stamp Duty Increase

Buy to Let lenders and mortgage brokers will also feel the pressure of getting mortgage offers out in a timely fashion, so forward planning is key if a new purchase is to be made without that extra 3% of the cost being added.

Whilst the Autumn Statement income tax and stamp duty changes have caused concerns, to my mind the biggest blow to the solar plexus came this week when Barclays and their UK Buy-to-Let arm, Woolwich announced they were increasing their rental coverage calculation from the industry standard of 125% to 135%

Woolwich explained they were concerned that the recent tax relief cuts may cause affordability shocks in the future and wanted to “protect landlords”. Worse was to follow when it emerged that Mark Carney was all in favour of the Financial Policy Committee being given the powers over the interest coverage rate, used in buy to let rental calculations.

In his Financial Stability report this week he stated he was concerned over the increased vunerability of buy to let borrowers to an interest rate rise, and income falls could trigger a large fall in house prices. The Governor has been vocal this year over his concerns that growth in the buy to let market and looser underwritting standards practiced by some newer lenders to the market, may be harmful to the economy.

The Financial Policy Committee wants the Treasury to give it powers to order lenders to place limits on interest rate coverage, and with Woolwich not wanting to wait to be told, it’s likely other lenders will also follow their lead. With 135% rental coverage some parts of the UK especially around London & the South East, deposits of around 50% are going to be needed to make the numbers add up.

There is a strong argument that buy to let mortgages should be treated just like any other residential mortgage when it comes to underwriting… a view I don’t support. First time landlords, maybe, but this would be overkill for the professional investor.

Time to invest in property elsewhere?

So what do these 3 changes mean. Well in the short term investors may need to look outside of their preferred investment areas, perhaps in the North of England where higher yielding properties will support lending at 75% loan to value. Maybe if you believe in the future of the “Northern Powerhouse” then you could be tempted to look elsewhere?

If not then there may be a shortage of properties in the South which can produce the sort of yield you're after, so speaking to your letting agent & mortgage broker and doing thorough research before making an offer is key. Failing that you’ll need to act now and get the purchase through before the end of March to save the Stamp Duty and with a lender who has retained the 125% rental spread.

Happy Hunting! 

Steve Bolt