Restricting mortgage interest relief for buy-to-let landlords will curb short-term lending in the sector and will slow house price growth, Moody’s said
It was announced in the Summer Budget that tax relief will be restricted for wealthier landlords, down from between 40 per cent and 45 per cent currently to 20 per cent for all individuals by April 2020.
Emily Rombeau, an analyst at Moody’s, stated the government’s decision to restrict buy-to-let mortgage interest relief reflects a willingness to put investors and owner-occupied borrowers on a more level playing field, given that the latter cannot claim tax relief on their mortgages.
She argued that first-time buyers’ affordability has declined, as they struggle to get on to the property ladder.
“Affordability constraints and demographic changes have increased the share of privately rented housing - this sector’s evolution has strongly contributed to the rapid growth of the BTL sector in recent years.
“Repeat issuers and new players will support a robust pipeline of buy-to-let residential mortgage-backed security deals this year. Issuance for this segment has accounted for 25.6 per cent of total UK RMBS issuance so far this year, up from 10.2 per cent in 2014,” Ms Rombeau added.
The latest Council of Mortgage Lenders’ data showed that buy-to-let continued to grow year-on-year - although it was flat month-on-month - with remortgaging up 36 per cent and house purchase up 20 per cent.
Moody’s forecasted that over the coming months, reduced demand for buy-to-let properties will soften UK house price growth. Despite this prediction, Moody’s stated UK house prices will still increase by up to 5 per cent in 2015, albeit at a slower pace than in 2014.
Ms Rombeau added: “Notwithstanding the softening in house price growth, the risk of an immediate house price decrease is limited, given the housing shortage and the economic recovery.”
David Whittaker, managing director of Mortgages for Business, told FTAdviser that the government has taken a political decision to ‘rein in’ the buy-to-let sector, which will have made up approaching 20 per cent of new domestic mortgage lending in the first half of 2015.
“We do not consider that the means adopted is either fair or likely to be very effective, since it only affects individual investors, with mortgages held within limited companies being unaffected by the proposed change.
“Buy-to-let is a long-term investment supported by lenders offering mortgages for the long term – in no sense is this ‘short-term lending’ as stated by Moody’s.
“Ultimately the landlord’s cost of borrowing is paid for by the tenants (out of taxed income) and if the effect of taxation changes is to push up landlords costs then, in a market constrained by the supply of rental properties, there is likely to be an increase in rental costs to tenants.”
While he admitted there will be some reduction in the demand for new properties by individual buy-to-let investors, Mr Whittaker said this is unlikely to have a significant effect on house price inflation.
“Doubtless there will be a windfall for the exchequer over the next two years as many buy-to-let investors will choose to move their properties into limited companies – but will have to pay stamp duty in order to do so.”
John Heron, managing director of Paragon Mortgages, commented that as the proposed tax changes are being phased in over a six year period, they have seen no impact in the short-term nor are aware of any impact across the market as a whole.
“We don’t quite understand the level-playing field argument, landlords already pay capital gains tax on any increase in the value of the property upon sale, whereas it is free of CGT for homeowners.
“It seems that landlords are being made a scapegoat here for wider failings in the housing market, particularly for affordability constraints which are essentially driven by a shortage in the supply of quality housing.”
Ray Boulger, senior technical manager for John Charcol, previously told FTAdviser that the Budget changes will force lenders to reassess their affordability calculation for buy-to-let mortgages, adding that higher rate taxpayers will see a “very significant” impact on their overall costs.
peter.walker@ft.com
