In the wake of the 2008/09 global financial crisis, UK Landlords invested in BTL property in their droves, where between 2011 and the post-crash peak in 2015, the number of new BTL mortgages almost doubled, from 62,000 to 118,000.
The reasons behind this sustained acceleration in demand are many and varied, but largely result from a series decline in property prices combined with an increase in demand in the private rented sector (PRS). Throughout the 1980s to the early 2000s, the share was steady at around 10%; over the past 15 years, however, demand for rental housing doubled to almost 20% in 2017-18, according to data published by the Ministry of Housing, Communities & Local Government.
The increasing unaffordability of housing for large sections of the population, younger households preferring the flexibility of rented accommodation, and the greater likelihood of migrant households being in the PRS have all contributed to this phenomenon. Moreover, in the wake of the imprudent practices pursued in the run-up to the financial crisis, the banks and other sources of residential mortgage finance significantly tightened their lending criteria, such that mortgages generally – and interest-only and high loan-to-value mortgages in particular – have been markedly harder to obtain.
On the supply side of the equation therefore, the picture for BTL investors had rarely looked rosier, where ultra-low interest rates served to enhance the net yield achieved and investors were additionally attracted to the potential for substantial capital gains.
Changes to landlord tax
The landscape has changed, however, and rapidly. The BTL investor is not yet extinct but is certainly becoming endangered. Recent tax, legislative and regulatory changes have restricted both the appeal of BTL as an asset class and the availability of the mortgages which support them:
- From 1st April 2016, homeowners purchasing a second home have had to pay considerably more in stamp duty – with a much lower starting threshold of £40,000, most second home purchases now attract an additional 3% stamp duty tax.
- From 6th April 2017, new rules laid down by HMRC have significantly curtailed the nature and extent of expenses that can be set against rental income, with the ‘wear and tear’ allowance of 10% of annual rent disappearing completely.
- Most importantly, since the 2017-18 tax year, mortgage interest payments have no longer been deductible for tax purposes. Instead, over a four-year transition period, the percentage of mortgage interest payments that can be set against rental income will decrease by 25%, and the proportion of those interest payments that qualify for a new 20% tax credit will increase by 25%.
New changes to legislation in 2020 have also meant mortgage interest payments are now wholly non-deductible from rental income before paying tax – instead, the entire sum of interest payments will then only qualify for a 20% tax relief.
This means that a BTL landlord receiving £10,000 in rent and paying £9,000 in mortgage interest will pay tax on the full £10,000, although the ultimate amount will still depend on their tax bracket. They will then be able to deduct £1,800 from their tax bill due to the 20% tax credit (£9,000 @ 20%).
Landlords in higher tax brackets will therefore be paying considerably more tax than previously, since they will be paying a percentage of the total rental income rather than the rental income minus their yearly mortgage interest payments. The only tax relief received is 20% of the interest payment, rather than the entire amount.
These developments have, unsurprisingly, had a profound effect on the BTL market, with the latest data published by the Centre for Economics & Business Research (CEBR) reveal that the number of BTL mortgages for property purchase dropped from the 2015 peak by 13% in 2016, by an even more dramatic fall of 27% in 2017, and a massive 35% in 2020, with the latter largely fuelled by the COVID-19 pandemic.
Property investment a COVID-19 World
Despite the significant impact to the economy, with UK borrowing now at its highest level since records began, the current COVID-19 pandemic has not impacted the residential property market to the same extent that we saw in the 2008/09 financial crisis.
Fundamental to this has been Chancellor Rishi Sunak’s Stamp Duty holiday, which remains in place until the end of March 2021 and enables residential buyers or Homeowners to move without having to pay any form of stamp duty on properties below £500K. As a result, house prices rose by 0.9% in September 2020, according to Nationwide, taking annual growth up to 5.0%, which is the strongest level since September 2016.
Although great news for Homeowners, these latest stats don’t benefit UK Landlords, as aside from BTL mortgages being exempt from the stamp duty holiday, rising house prices limit the potential returns on new investments, particularly with limited stock on the market up for grabs as the average time taken to sell a residential property fell by an astonishing two weeks during August 2020 alone.
It’s, therefore, clear that although the vast majority of investors perceive periods of economic downfall as an opportunity to expand their portfolio, the same cannot be said for the BTL market in a COVID-19 world. The growth of UK property prices, combined with evolving changes to Landlord tax over the last 5 years have significantly impacted the level of returns from BTL, with the average annual yield now just 3 – 4%.
Consequently, it comes as no surprise that increasing numbers of Landlords have turned to property bonds as an alternative means to secure attractive returns on their hard-earned capital; enabling savvy individuals to invest in the development of a property, without the hassle of owning it.
As a ‘Lender’ not a Landlord, investors trade the hassle of managing tenants and day-to-day financial issues such as maintenance fees, insurance and tax for a fixed rate of return at an average of 8 – 10% over a fixed period of time, confirmed through a legally binding agreement.
However, not all property developers – and therefore not all bonds – are the same and it’s imperative that any Landlord looking for a smarter way to invest completes the necessary due diligence or turns to the support of a reputable investment introducer, like Hunter Jones.