The number of amateur landlords buying new properties continues to tumble as recent tax changes bite. According to figures from trade body UK Finance, there were 5,500 new buy-to-let home purchase mortgages completed in May, some 9.8 per cent fewer than in the same month a year earlier.
That shows the attraction of buy-to-let is continuing to fade as the 3 per cent stamp duty surcharge means those buying rental properties must pay thousands to the taxman.
By value there was £700million of buy-to-let lending in the month, 22.2 per cent down year-on-year.
Jackie Bennett, director of mortgages at UK Finance, said: ‘Purchases in the buy-to-let market continue to be constrained by recent regulatory and tax changes, the full impact of which have yet to be fully felt.’
Buy-to-let remortgages increased slightly, climbing to 14,600 in May from 12,700 for the same month last year. By value this was £2.3bn of lending in the month, 21.1 per cent more year-on-year.
How much does it cost to get into buy-to-let?
Following a number of changes over the past two years, It is now far more expensive to purchase a buy-to-let property.
The extra 3 per cent surcharge on stamp duty means that a £250,000 property spells a £10,000 tax bill for an investor.
This compares to the £2,500 it costs an owner occupier, which is the same amount a buy-to-let investor would have paid before the hike kicked in.
Understandably, this has considerably slowed the market for amateur landlords. The extra £7,500 in tax is money that they cannot put into a deposit on the property and most buy-to-let mortgages require at least 25 per cent down.
The deposit on a £250,000 buy-to-let would be £62,500, with the stamp duty bumping that bill up to £72,500 before any conveyancing and mortgage fees.
It is also tougher to get a mortgage to begin with and landlords face bigger income tax bills on rent, as full income tax relief on mortgage interest is rolled back towards a maximum 20 per cent tax credit.
A crucial change also adds rental income to a landlords other income to decide what rate of tax they pay – bumping some up into higher brackets – and overall the changes mean a landlord pays tax on revenue not profit.
Last month research from the Ministry of Housing revealed that the number of privately rented homes in England fell by 46,000 to 4.79 million last year – the largest reduction since 1988.
The reduction in privately rented homes marked the end of a rise in the volume of rental dwelling stock that had been ongoing for nearly two decades.
The number of first-time buyers is on the rise
The figures weren’t all doom and gloom, however, because where buy-to-let investors are missing out, first-time buyers appear to be stepping in.
There were 32,200 new first-time buyer mortgages completed in the month, some 8.1 per cent more than in the same month a year earlier.
The average first-time buyer is now 30 and has a gross household income of £42,000, according to the research.
Andrew Montlake, director of Coreco Mortgage Brokers, said: ‘What is most encouraging in these figures is the continued increase in first-time buyers and the return of homemover.
‘There are still challenges in the form of stamp duty costs and affordability, but the slight dampening of house prices coupled with continued low mortgage rates has begun to encourage more home owners to finally make the move they have been putting off for a while.’
There were 36,000 new homeowner remortgages completed in the month, some 7.1 per cent more than in the same month a year earlier. The £6.3bn of remortgaging in the month was 6.8 per cent higher than last year.
Jeremy Leaf, estate agent and a former RICS residential chairman, said: ‘These strong numbers from UK Finance reinforce the view that interest rates are likely to rise sooner rather than later.
‘Unfortunately, any imminent rate rise is likely to have a disproportionately negative effect on already brittle confidence.
‘On the ground, business is still one month up, one month down, with no clear pattern other than a fairly fragile price-sensitive market where confidence is weak at best.’
The changes to buy-to-let
Former Chancellor George Osborne first announced a tax raid on landlords in 2015, stating the move was designed to support home ownership amid claims that landlords were scooping up properties and making it harder for hopeful first-time buyers to compete.
Intending to put a stop to this, the Government slapped a 3 per cent surcharge on stamp duty payable on new buy-to-let purchases from April 2016. This trebled the tax bill compared to residential property in some cases.
A further change arrived in April last year, as landlords began to lose their tax relief under a rule known as Section 24, which also forces them to pay tax on their rental income rather than just on their profit after mortgage costs.
Furthermore, the Bank of England also clamped down on mortgage lenders, forcing them to require landlords to earn a much higher ratio of rental income compared to their mortgage payments.
In October last year, further rules were brought in for landlords with four or more mortgaged properties to ensure their debt levels are not too high.