Buy-to-Let’s Loss: First-Time-Buyers’ Gain?

There was a distinct boost in housing market activity in the first few months of this year, according to the Council of Mortgage Lenders 1. Attributed in part to the changes to Stamp Duty Land Tax (SDLT) on the purchase of additional residential properties above £40,000 in value, introduced in early April 2016.

These changes (also affecting Land and Buildings Transaction Tax in Scotland) meant that a landlord buying a property for £200,000 prior to April this year would have paid just £1,500 in SDLT. After the change, the charge has risen to £7,500 for the same property purchase. This may explain why the value of buy-to-let loans rose to £7.1bn in March – up by 142% on the figure for March 2015.

Another Blow

Furthermore, landlords who were previously able to claim mortgage interest relief at the 40% or 45% rate, will now find this relief restricted to 20% after April 2017. That’s not all; landlords with buy-to-let mortgages will no longer be able to deduct costs such as mortgage interest, or loans taken out to improve the property, or fees. Instead, after April 2017, they will only receive a basic-rate reduction from their income tax liability for their finance costs. The 10% allowance for wear and tear is also going, with landlords able only to deduct the actual costs incurred.

A Positive for First-Time Buyers

If this is deterring some would-be landlords, it presents an opportunity for first-time buyers, given that investing in a second home now incurs an extra 3% SDLT surcharge. With less competition for ‘entry-level’ properties, the next few months could prove a favourable time for frustrated first-time buyers to enter the market.

Is The Thirst for Buy-To-Let Over?

Not necessarily, since some buy-to-let investors are beginning to invest via their own limited companies in order to mitigate these tax changes and, with interest rates remaining low and investment markets volatile, many will elect to stick with property.

House prices have risen strongly over the past few years, as have rents. Both buy-to-letters and first-time buyers may decide that property investment remains a sound choice. Both should look carefully at their budgets and as ever, bear in mind that property, as with all investments, can go down as well as up.

(1) Council of Mortgage Lenders, May 2016