UK Edition
'The Government's buy-to-let tax changes mean I will have to sell - or raise rents'
Further evidence is emerging of the pressures that are building on buy-to-let landlords as a result of the Government’s tax increases.
Even a modest rise in interest rates would force losses on property investors in 70pc of locations, new figures show, while more landlords have come forward to say they will sell their properties or raise rents in response to the abolition of tax relief on mortgage interest and the new stamp duty penalty.
The research found that today’s average profits for landlords of about £3,400 a year would turn to a loss of more than £300 if mortgage rates rose by 2.5 percentage points by the end of the decade (see below for details of the research).
Jaye Cook, 34, who owns five properties in Kent, is so worried about the tax changes that he plans to sell some of his existing portfolio or raise the rents he charges his tenants.
Mr Cook, a self-employed business consultant, started investing in property 15 years ago with his wife, Emma, also 34, and had planned to continue developing his portfolio with a view to bolstering his retirement income.
The couple live in Chatham, Kent, with their two children, four-year-old Madison and 18-month-old Devon. “My biggest fear is that I’ll start to make a loss every month once this landlord tax kicks in, as we’re going to be taxed on the revenue rather than the profit,” he said. “These changes will force landlords to raise their rents to make ends meet, or they’ll sell up and create a glut of buy-to-let properties.”
He said the changes had “come out of the blue” and that he was worried about the possibility of more new policies that penalise buy-to-let investors. “When the Government made the announcement in last year’s Autumn Statement I didn’t think it would come to fruition because I felt the changes were isolating the Conservative voter,” Mr Cook said.
But he is now considering his options on the basis that the new taxes will take effect as planned. “I would sell my buy-to-let property portfolio if I wasn’t tied into fixed mortgages and because I think there will be a dip in property prices after April’s stamp duty change,” he said.
“We will have to make a decision as the various fixed rate-deals come to an end.” “The other way to cope is to increase rents. I would feel guilty if I had to do this on the basis of the tax changes, but if we don’t we will end up with losses. We will decide within the next 12 months.”
- Budget devil in the detail in our next money newsletter
How new taxes and interest rate rises would decimate profits
Buy-to-let could become unprofitable in seven out of 10 towns and cities by 2020 if interest rates were to rise by 2.5 percentage points, according to data obtained by Telegraph Money.
Using current house price, rent and mortgage data, the figures showed that landlords with 40pc equity in their property and a mortgage currently fixed at 3pc for three years would be making an average annual loss of £325 by 2020.
The data, provided by Property Partner, a “crowdfunding” website, covers more than 100 of Britain’s largest towns and cities. At present, landlords’ average net profit is calculated at £3,419, falling to £2,555 by 2020 even if mortgage rates remained at 3pc, thanks to the phasing out of mortgage interest tax relief. A 2.5 percentage point rise in mortgage rates would be enough to produce the £325 loss.
Investors in some towns face bigger losses. In Salisbury, landlords currently make an average annual profit of £2,200, the data shows.
By 2020, with both a cut in mortgage tax relief and a 2.5 percentage point rate rise, they would make a loss of £2,984 a year – a swing in fortune of £5,184.
In Cambridge and Winchester the reversal in fortunes would be even greater. In Cambridge the average profit today is £4,257 but would swing into the red with a £2,418 annual loss in 2020.
In Winchester an annual profit today of £5,835 would be wiped out and landlords would face an annual deficit of £2,169. Fewer than one in five towns and cities will offer a net rental profit of more than £100 a month by 2020, according to the data.
- For fee-free advice on your next mortgage, visit the Telegraph Mortgage Advice Service
Mortgage tax relief blow
At present landlords can claim for interest on buy-to-let mortgage payments when they complete their tax return, allowing them to offset mortgage interest against rental income. Changes are being made to this system gradually from April 6 2017, with full implementation by 2020.
In effect, landlords will be taxed on their turnover rather than profit. Our buy-to-let tax calculator at telegraph.co.uk/go/buytolettax shows how profits will be affected by the new tax over the next five years.
Chris Norris, head of policy at the National Landlords Association, said: “These changes are going to drastically increase tax bills and running costs for landlords. “If landlords want to stay in the market, they won’t have any choice but to increase rents, although this could be very difficult. We also expect a considerable number to exit the market over the next five years.”
Will mortgage rates rise?
Interest rates will remain at their record lows until 2019, according to recent forecasts.
Mark Carney, the Governor of the Bank of England, said this month that an “unforgiving” global environment was likely to keep rates at a record low of 0.5pc for longer than previously expected.
The prediction had been for a rise in Bank Rate in December this year or January 2017, following the first rate rise in the US for nine years in December last year.
However, following fresh economic gloom earlier this year the money markets now imply that the first increase will come in August 2019. In recent months fixed and variable buy-to-let mortgage rates have reached new lows, because lenders have cut their rates before April’s tax changes take effect.
There has also been a rise in the number of buy-to-let loans on the market, from 823 in February 2015 to 1,288 this month.
Rachel Springall of Moneyfacts.co.uk, which collates rate data, said that while rates were low at the moment they were expected to rise eventually. “The buy-to-let market has been thriving not only from low interest rates but also from an abundance of options for prospective or existing landlords. Lenders have been locked in a price war to win over borrowers, meaning rates on buy-to-let deals have fallen to record lows.
“But any prospective landlords need to consider future costs such as interest rates rising – as they will eventually.”