In the last budget George Osborne announced that tax relief for landlords is to be cut, limiting the amount of income they can offset against mortgage interest payments. While the detail is fairly convoluted the basic outcome is that many, if not most, let properties will be less profitable – or indeed make an annual loss (though it’s to be hoped property price growth will ultimately overcome this).
The change is to be phased in and won’t be fully in place for another four years but already landlords will be starting to feel the pinch.
In recent weeks lenders have started looking ahead to the full reduction in tax relief and tightening lending policy as a result: if the property will be less profitable in a few years time, they reason, we should assess it on those terms today.
The first and biggest name to go was The Mortgage Works, increasing their requirement from 125% coverage to 145%. So for example, under the previous policy a £150,000 loan at a notional rate of 5.50% would cost £687.50 per month.
The Mortgage Works wanted an extra 25% coverage of that, so to qualify for the £150,000 loan landlords needed £860 rent per month. Under the new policy they would need £997 per month – almost £140 more.
Other lenders have started to follow suit including Barclays, Keystone and Newcastle, and it’s certain all lenders are reviewing their stance though many have yet to make a move.
So how should landlords react to this?
While many lenders have yet to tighten policy, that’s not necessarily a signal to get in before they do – the driving force behind this is that, all other things being equal, most buy to lets will perform less well in the future.
But it does present an opportunity to review current properties and try to mitigate the impact: securing a low rate now could cut outgoings and help build up a reserve to either cover rental shortfalls or reduce the mortgage in future.
Increasing rent is an option too of course, and no doubt many will, but there’s naturally a limit to how far this can go, determined by local housing supply and incomes.
Clearly any planned purchase needs to be assessed on how it’s going to work in a few years time, not just at the outset.
If you are an existing landlord or are considering purchasing a Buy-to-Let property, and need mortgage advice, then please speak to the Guild Mortgage Service provided by fee free L&C Mortgages.
You can contact L&C mortgages on: 0800 073 1945