More than half of landlords believe they will be hit by the forthcoming changes to both income tax relief and stricter mortgage affordability checks, according to new research.
The survey carried out by Mortgages for Business found that 60% of landlords now believe they will be affected by the incoming changes to tax relief and new measures by the Prudential Regulation Authority requiring tougher affordability checks on buy-to-let loans.
While 11% of landlords said that they still didn’t know if the changes would affect them directly 29%, said they wouldn’t.
These landlords are likely to be a mix of basic rate income tax payers and landlords who operate their portfolios through limited company vehicles which are subject to corporation tax.
Rather worryingly, the survey found that 9% of respondents did not know how the revised affordability calculations would affect how much they could borrow and 6% were completely unaware of the new guidelines.
David Whittaker, CEO at Mortgages for Business, said: “The percentages feel about right for the market in general and it’s certainly been a tough 18 months or so for landlords, so it’s encouraging to learn that the majority are getting to grips with changes that will dramatically alter the way they operate.
“We are still encouraging landlords who haven’t already taken professional advice on the matter to do so ASAP, as some may find that the new formula will tip them into the next tax bracket leaving them worse off. The new regime starts in April, so there’s not much time left to make strategic decisions and take action.”
The Bank of England’s Prudential Regulation Authority introduced tougher underwriting standards and affordability assessments on 1 January to make sure borrowers can cover the cost of their mortgage in the event of an interest rate rise.
Lenders will be required to set a minimum borrower rate of 5.5% during the first five years of a buy-to-let mortgage contract when assessing affordability.
They will also have to take into account annual rent rises of 2% when assessing whether a landlord can afford a property.
Portfolio landlords with four or more rental properties will be subject to stricter checks on income and debt.
Mortgage interest relief for residential buy-to-let properties is set to be reduced to the base income tax rate, which is 20%.
It is due to be phased in over a four-year period starting from April 2017. Landlords are currently able to claim tax relief on the top rate of tax of up to 45%.
The changes mean landlords will no longer be able to deduct mortgage interest payments or any other finance-related costs from their turnover before declaring their taxable income.
The survey also found that landlords are continuing to move toward incorporation, with 32% of respondents owning at least one property in a limited company, up 2% on May 2016.
Many landlords are setting up limited companies as they are still able to deduct mortgage interest from their rental income when calculating profits.
When asked whether future purchases would be made personally or using a limited company, 54% opted for the just incorporated route and 16% said they would use both.
The changes to underwriting standards are expected to reduce the number of new approvals for buy-to-let mortgages by about 10% to 20%.
However, despite a tougher operating environment, Mortgages for Business found the proportion of landlords seeking to expand their portfolios rose to 45%, up from 41% in May 2016. This suggests that most are willing to absorb the increased costs, adapt strategies and remain in the property investment market.
