The last quarter of 2018 saw buy-to-let yields hit a three-year low, down 5.6 per cent on the previous quarter. Squeezed by tax and regulatory changes, many landlords are struggling to meet their margins and market confidence has taken a hit. So what’s the outlook for buy-to-let as a source of income? Article by Nick Green.
The start of the 2018/19 tax year saw the government roll out a number of important changes to the way that buy-to-let is taxed and regulated. Mortgage interest relief that allowed landlords to offset mortgage interest payments against rental income was restricted, and a new stamp duty charge was introduced for second home buyers.
The last quarter of 2018 saw buy-to-let yields hit a three-year low, having fallen 5.6 per cent from the previous quarter. Research by BM Solutions also found that confidence among landlords had taken an 8 per cent hit going in to the new year.
The effects of the changes on the market have so far been relatively small, but they are being felt. Figures from the Office for National Statistics show that the average price of flats and maisonettes dipped by 0.4 per cent at the end of 2018, which may be the first evidence of how much of a disincentive the changes are to buy-to-let investors. However, an additional factor may be the difficulties that first time buyers continue to face in trying to raise high deposits.
Landlords favour remortgaging over buying
David Blake of Which? Mortgage Advisers thinks this year could see a lot of landlords looking to remortgage. He said, ‘While existing landlords may feel taxed, it’s not all doom and gloom. Remortgaging rates are incredibly low and with such competition in the market, there’s arguably more choice of lender and product than ever before.’
Landlords would seem to be in agreement. Remortgaging currently accounts for 57 per cent of buy-to-let mortgages, suggesting that the market mainly consists of existing landlords who are trying to hold their ground, rather than new or growing buy-to-let businesses making new purchases.
The beginning of January 2019 saw the average rate on a buy-to-let fixed rate mortgage at 3.3 per cent, meaning that many landlords could potentially get themselves a better deal to cushion the effects of the recent changes. These more attractive deals are being fuelled by fiercer competition among the chief buy-to-let lenders, who are looking to pick up more business in the face of an anticipated slump in the market, with Brexit looming. There are some good five-year fixed rates out there, and fee-free and cashback deals are becoming increasingly common, so from that perspective landlords are in a buyer’s market.
New borrowing limits increase the pinch
On the downside, new borrowing guidelines from the Prudential Regulation Authority (PRA) are restricting the amount that landlords can potentially borrow. The guidelines require that rental payments should exceed mortgage repayments by 45 per cent, which will significantly limit the purchasing power of smaller landlords in particular.
However, lenders have stepped up in response. Some banks are reducing their mortgage income coverage ratios (ICR) – the amount by which they want rental payments to exceed mortgage repayments – so that it is still possible to obtain a mortgage where the rent is only 25 per cent higher than the repayments.
In terms of the current outlook, buy-to-let appears to be very much at a balancing point, with downsides being countered to some extent by attractive mortgage deals. However, lending rate may tighten depending on the outcome of Brexit, so the nervousness in the market remains. Anyone in the buy-to-let market or looking to enter it in the near future should proceed with caution.