We wrote last year that if you were in the market for a two-bedroom flat you'd be wise to wait a year or two before you bought, because the changes to the tax relief around buy-to-let would bring a flood of property on to the market. We will soon find out if we were right.
So this year, 25% of the mortgage interest costs of anyone who has borrowed to buy to let will get tax relief at only the basic rate of 20%. Next year it will be 50% and so on. The effect of this is nasty.
An illustration from RSM. Consider someone with a £600,000 property getting a 4% yield. After running costs, repairs, insurance and other costs, their net yield may only be just under 3% say around £17,700 per annum. With a mortgage at 60% loan-to-value and 4% interest, they would be paying out £14,400 in interest costs. So they would be making a net profit of £3,300.
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This year (assuming they are a 45% taxpayer) their bill is £1,485. Next year it will be just under £3,300 that's all the profit they currently make. In the year after, it will be £4,185, and just over £5,000 thereafter. By the time this is done, it will be costing them £1,700 to keep the show on the road and that assumes an interest-only mortgage and no rise in the rate.
Some numbers will be higher, some will be lower, and for all those who own outright none of this will make any difference. But as RSM says "the truth is that margins are getting tight for landlords". Rents could go up in some areas to cover the difference, but in most cases landlords will have already been charging what the market can bear and, of course, should Jeremy Corbyn end up as prime minister, rent controls are a given anyway.
This all matters. Lots of landlords don't feel they need to make much positive cash flow on their houses on an annual basis: their aim is to own a property outright at some point (so just getting the mortgage paid and being cash neutral will do) or to sell it on for capital gains.
But if their houses actually start to cost them on a monthly basis, the equation changes. Will they dig into non property income or savings to meet the gap, or will they sell? We suspect they will sell, something that will drag prices down across the board.
This is something landlords might want to think about sooner rather than later (best to sell before everyone else does ) and buyers will want to think about later rather than sooner (best to buy at the tail end of the rush to sell).
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