The mortgage market has demonstrated commendable resilience since the result of the UK referendum, with the level of mortgage approvals steadily improving during the months following the vote. A considerable spike in activity was evident in the first quarter of 2016, as many buy to let investors rushed to beat the introduction of the additional three per cent stamp duty charge for owning a second property.
Since that time, this sector of the market has slowed down and at present there is no clear direction being presented by the current Government for dealing with property investment. Philip Hammond, the current Chancellor, did not attempt to address this during his recent Autumn Budget, so it currently appears that the previous Governments view is still the pervading vision for the sector.
Last summer Mr Osborne confirmed in his budget that from 2017 the government would alter the way in which buy to let landlords are currently able to offset mortgage interest, against their annual tax bill. The expectation is that this, along with additional changes to taxation on income, would mean that higher-rate tax payers would receive half of the tax relief currently available by 2020.
For anyone that has recently attempted to secure mortgage funding, it may have been acutely clear that processing timescales via UK lenders have been particularly slow in 2016. This is mainly due to the second change implemented by the Chancellor, which took effect from April 1st.
As of that date, any property purchaser in the UK looking to buy a second property, whether to let the home or not, would be liable to pay an additional three per cent stamp duty land tax on top of the standard charge payable for the purchase. As such, the mortgage market saw a sharp increase in applications for mortgage funding at the turn of the year, as borrowers looked to beat the charge.
The Bank of England has also become a vocal challenger to the current status quo of the buy to let market, out of concern that the demand for property for this sector of the mortgage market could present a major problem if an economic downturn were to again hit the UK. The BOE believe that such an event would potentially push many buy to let investors to pull out of the market in force, opening a hole in the economy that would not be readily filled.
To stave off interest in the sector, the Bank of England has pushed UK lenders to begin basing affordability assessments for buy to let properties on the borrower’s overall finances, as opposed to the previous method of solely confirming that the rental income covers the mortgage interest payment.
While these plans may aid to stabilise the market, opposition is certainly not in short supply. By changing the rules on taxation, the government expect buy to let investors to be less prominent, so the theory is that there will be less of a challenge to first time buyers in securing a property. Detractors have instantly noted that landlords are likely to offset their own costs, by raising rents, which conversely affects the saving power of any would-be buyer looking to make the leap to becoming a homeowner.
The alteration to the stamp duty charges may whittle down the level of potential investors, but those without the need to raise mortgage finance or investors looking at the long-term view, are unlikely to be dissuaded from pursuing a buy to let property. Retirement planning has changed considerably since the pension market has seen a variety of negative revisions made in recent times, so many financially savvy individuals will take the higher stamp duty costs now, with the expectation that property value growth will provide a better long term return that simply saving.
The same issue can also be attributed to the Bank of England’s attempts to reduce lending for buy to lets. As investors see dwindling returns on their savings, many will continue to look for alternatives to bolster their income. Market commentators feel that the changes to affordability are likely to reduce the availability of housing stock, as achieving mortgage finance becomes harder to attain. Housing experts continue to call for a relaxation of planning restriction to allow more homes to be built, coupled with a raise in interest rates, as the only true preventative to reducing house pricing and increasing the level of property availability in the UK.
Article by: Simon Butler, Associate Director at Contractor Mortgages Made Easy
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