Starting in 2017 and completing by stages this year, mortgage interest tax relief is being phased out. Landlords will no longer be able to offset interest costs against profits.
Instead they will get a mere 20 per cent tax credit.
As a result, every mortgaged landlord who pays 40 or 45 per cent tax is already paying much more.
But some basic-rate taxpayers will also be affected because the change will push them into the higher-rate tax bracket.
That tax credit helps pay their tax bill, but it does not reduce their taxable income in the way that offsetting mortgage interest used to.
Those who are worst affected will see:
- Actual tax they pay on their investment rising twofold or even more
- For some the loss of mortgage interest tax relief has actually pushed their BTL investments into losses, making their investment financially unviable and forcing them to increase rents sharply or sell.
BTL investors seeing lower returns
A recent survey of landlords by lettings platform Howsy, found that there has been a 17 per cent decline in profitability in the last 12 months alone.
The average annual return on a BTL property is down to £2,140 per year, equating to an annual yield of 4.4 per cent.
Average mortgage value on BTL properties equates to just over 71 per cent Loan to Value. Most BTL investors think this is too high to ensure profitability today.
House prices are set to see an average drop of 13.8 per cent in 2021 (as compared to 2020) and this significant correction is already underway, according to the Centre for Economic and Business Research (CEBR).
Property moves in cycles, and those cycles move slowly. The favourability of tax and regulation towards or away from BTL is no exception. Right now, BTL investing looks set to be in the negative part of its cycle for a little while longer.
Local councils driving rapid rental stock increases
Looking more widely at where new housing stock is coming from, an increasingly large percentage is being delivered by Local Housing Companies (LHCs) controlled by councils.
Collectively, LHCs could increase new build completions from 2,000 homes a year to 10,000-15,000 homes each year by 2022, with perhaps a quarter of the total completions in London coming from this route. Most of these will be designed for long-term renters.
A report I read estimated that 30 to 40 per cent of new LHC homes are likely to classify as affordable housing. Councils are attracted to LHCs because they want more control and influence, and greater freedoms and flexibilities (especially over rents, borrowing and the Right to Buy).
Financing schemes aiding first time buyers
Help to Buy equity loans, buying through shared ownership and Help to Buy ISAs are also working to make it easier for first time buyers to get on the housing ladder, thereby reducing demand for rental properties and, by stages, making BTL investing less attractive.
The result is likely to be more BTL investors offloading their portfolios at the exact time when residential property prices are already looking vulnerable because of this Covid-19-led recession, fuelled also by the approach of the end of the current stamp duty holiday next March.
