21 Dec 2015
Comment: Buy-to-let under the microscope
Adrian Sangster, Leasing Director, discusses the outlook for the buy-to-let market.
Forthcoming changes
As expected Scotland’s Finance Secretary John Swinney followed the UK Chancellor’s lead and announced that from April 2016 a 3% surcharge would be added to the purchase price of properties intended for letting or for second homes. This is to be added to the existing Land and Buildings Transaction Tax (LBTT).
The introduction of the supplement ends a year where private sector landlords have seen their right to claim tax relief worth 40% of interest payments and the 10% wear and tear allowance removed.
Immediately prior to the Finance Secretary’s announcement Mark Carney, Governor of the Bank of England (BoE), warned he was concerned at the amount of people taking mortgages to invest in property.
Effects on property investors
It is reported that the Treasury is ready to hand powers to the BoE so it can force banks to cut back on, what they believe to be, risky buy to let loans. The BoE fears if the market becomes inflated and the bubble bursts, that prices could fall with landlords facing hefty losses.
It is anticipated that any action that the BoE would take would be in the form of a ‘stress test’. At the moment when a lender is considering whether to grant a mortgage on a buy-to-let property they focus on the rental return (which has to cover the interest on the loan) rather than the potential borrower’s income. City analysts are suggesting that in future, lenders may be requested to check that the borrowers’ rental income would continue to cover their mortgage repayments even if interest rates rose by 3%.
The fear from those who work in the industry is that the combination of these changes will affect the business viability of the private rented sector in Scotland. As a result we may see landlords leave the sector, or be forced to increase rents to cover their additional costs.
Ultimately it may therefore be those vulnerable tenants, who the Finance Secretary claims to be trying to help, that suffer most as the availability of affordable accommodation reduces.
Conclusion
The changes which will be introduced from April 2016 may lead to an increase of buy to let purchases before the end of March in an attempt by landlords to beat the deadline. However if landlords decide that they can no longer invest in the sector in the short term it may mean a reduction of available properties, thus exacerbating demand and fuelling rental increases.