Business

Buy-to-let sector becoming more financially unattractive

Major changes are afoot in the buy-to-let housing market
Major changes are afoot in the buy-to-let housing market Major changes are afoot in the buy-to-let housing market

Is it time to make a hasty, but organised retreat from buy-to-let?

Just as the chancellor George Osborne did a complete U-turn and dumped his entire credit tax reforms at the start of his Autumn Statement, is now the moment to cut and run?

The chancellor has had landlords in his sights all year. His last budget hit them hard. As well as abolishing the annual 10 per cent “wear-and-tear” allowance from next year, the right to claim mortgage interest will reduce each year until 2020, when it will settle at 20 per cent.

Already, many landlords have sat down with their independent financial adviser (IFA) to confirm just how that will impact on this property investment.

Here’s the rub: landlords have been able to claim all the mortgage interest claiming it’s a business expense. Osborne believes not, and insists that for many it is simply an investment – hence those changes.

It has been Osborne’s own pension reforms and freedom that have partly led to this buy-to-let boom. Those of a certain age have invested in a second property as part of their pension portfolio.

But Osborne is also well aware of the housing crisis and the struggle for first-time buyers to get on the property ladder; so, what the chancellor has given with one hand, he is now taking away with the other.

Landlords, who believed that there could be no more bad news, were stunned by the new measures in the Autumn Statement that grabbed the headlines away from his remarkable U-turn and made “buy-to-let” even more financially unattractive.

Whereas his reforms reclaiming mortgage interest are gradual, this time he is wasting no time. From next April, anyone buying a second home or buy-to-let property will pay a 3 per cent surcharge on stamp duty.

As we approach Christmas and the festive season, traditionally a quiet time for the property market, buyers will have to move quickly if they are to complete a purchase before the surcharge comes in.

“People buying a home to let should not be squeezing out families who can’t afford a home to buy,” was the chancellor’s explanation for this targeting of landlords.

“Many of them are cash purchases that aren’t affected by the restrictions I introduced in the budget on mortgage interest relief, and many of them are bought by those who aren’t resident in this country.”

That sounds like the chancellor is basing his new policy very much on what is happening to the London property market, which has always been recognised as having a life of its own and little relevance to the rest of the country.

Osborne wasn’t finished though. Just as dazed landlords were getting up off the canvas, he threw his final “buy-to-let” punch that has left many reeling.

New capital gains tax rules will force buy-to-let landlords to pay that tax within 30 days of selling a home, as opposed to waiting until the end of the tax year as they do now. This new rule will apply from April 2019.

The timing of all these various buy-to-let changes, none of which will financially benefit landlords, appear to be such as to allow an orderly rush for the exit door without creating “bust” after this particular boom.

Buy-to-let appears to be a victim of its own success, especially since the 2008 recession. There have been few places to put your money and achieve any sort of return in the past seven years.

Saving rates have been at record lows; equities have recovered but the markets are volatile and the gilt-edged dividends from the banks and mining shares have all but disappeared.

Property has not only been a safe haven, but a profitable one.

With record low interest rates, mortgage lending is now at a seven-year high. At the same time, banks gave more in loans and overdrafts in October than they had in almost a decade.

October mortgage lending rose to £12.9 billion, 26 per cent higher than a year ago and the highest since 2008. Re-mortgage approvals were 34 per cent above the levels of a year ago.

Some believed that Osborne’s buy-to-let measures, even before the Autumn Statement, could lead to a housing crash. Early in the year, the Bank of England had warned the buy-to-let boom could pose a threat to financial stability.

Because buy-to-let loans are not regulated in the same way as residential mortgages, there have been on-going discussions with the Treasury re giving the Bank of England more powers in this area.

That might not be necessary after Osborne’s latest “one-two” blow in the Autumn Statement. Only time will tell whether that is a knock-out punch.

Clearly, the stamp duty surcharge will impact on those thinking about entering the buy-to-let market or increasing their portfolio; those already investors have been sifting through the small print since the budget.

As ever, the expert advice of an IFA gives you the chance to make a much better judgment on whether buy-to-let is for you. Obviously, it is not as attractive an investment as it was a year ago.

That does not mean it should be discarded altogether. As mentioned earlier, it is tough to find places to make your money work for you at present. It may still be a good investment, especially if you can make that property purchase before next April!

:: Darren McKeever (dmckeever@ wwfp.net) is Northern Ireland adviser of Worldwide Financial Planning, which is authorised and regulated by the Financial Services Authority. For a free, no obligation initial chat about your individual finances, call 028 68632692, e-mail info@ wwfp.net or click on www. wwfp.net. Follow us on Twitter: @WorldwideFP.