Buy-to-let landlords move into shops
The government is chipping away at the appeal of buy-to-let residential property, says Natalie Stanton, prompting some buyers to look for alternatives.
In recent months, the government has been gradually chipping away at the appeal of investing in buy-to-let residential property. Hence some prospective buyers seem to be looking for alternatives, such as semi-commercial property, also known as mixed-use buildings essentially any property that has both residential and commercial elements, such as a shop on the lower floor and a flat above.
One fifth of property investors are now considering these types of property, according to research from Mortgages for Business, a broker, more than twice as many as were doing so in November 2015.
The increased appeal of semi-commercial property is largely due to the new stamp-duty rules that came into force in April. The government introduced three percentage point surcharge on second homes and residential buy-to-lets but commercial and semi-commercial property remains exempt.
Indeed, recent changes to commercial property rules have been more favourable to investors. In March, the government overhauled the stamp-duty regime for these buyers, charging a different rate for each band of the property's value rather than paying a flat rate. The Treasury reckons this will lower stamp-duty bills for 90% of buyers. As a result, a buyer of a £300,000 buy-to-let property would pay £14,000 in stamp duty. But a buyer of a mixed-use property for the same amount would pay just £4,500, says The Daily Telegraph.
Commercial property has also managed to dodge another new policy that is aimed at cooling the buy-to-let market. At the moment, landlords are able to claim for interest on buy-to-let mortgage payments when they complete their tax return, allowing them to offset mortgage interest paid against rental income. But in future, higher-rate taxpayers won't be able to make this deduction.
This will increase taxes and running costs for landlords. However, the change won't affect individual landlords who buy mixed-use properties, who will still be able to claim tax relief on mortgage interest after the new regime is introduced in April 2017.
Of course, there are other reasons why individual investors have tended to favour residential property rather than commercial buildings. One is that commercial mortgages tend to have relatively high interest rates, compared with buy-to-let mortgages. However, if commercial property becomes a more popular choice among traditional buy-to-let investors, this could change: mainstream providers might begin to offer commercial mortgages at lower rates in order to take advantage of growing demand.
Another obstacle is that owning and renting out a second flat or house is a relatively small step for an investor who already owns their property. But stepping into commercial property for the first time may seem a bit more intimidating.
This explains why buy-to-let investors are apparently focusing on mixed-use properties, where at least the residential component is familiar, while the presence of a small commercial business means an opportunity to diversify. Of course, the big question is whether this blatant loophole in the new buy-to-let stamp-duty rules will quickly be closed if investors begin to flood in.
Lenders have retreated from offering interest-only mortgages over the past four years, according to the Council of Mortgage Lenders, a trade body. Since the rules surrounding these types of mortgages were tightened in 2012 following concerns about lax lending, the total number of loans has plummeted by a third, from 3.2 million to 2.2 million.
Some of these loans will have reached maturity, but 29% of the redeemed loans were not scheduled to mature until at least 2028. This implies that lenders have been steering borrowers away from interest-only loans when they remortgage to take advantage of lower rates.