UK buy to let tax change will restrict lending in the short term, says new report
The restriction of mortgage interest relief for UK buy to let landlords will, in the short term, curb lending in the sector, which currently makes up 15% to 16% of mortgage lending, according to a new analysis.
At the same time, 2015 is on track to become the best year for buy to let mortgage deal issuance since the credit crunch, says the special report from Moody's Investors Service.
‘The government's decision to restrict buy to let mortgage interest relief reflects a willingness to put investors and owner-occupied borrowers on a more level playing field, given that the latter cannot claim tax relief on their mortgages,’ said Moody’s analyst Emily Rombeau.
‘First time buyers' affordability has declined, as they struggle to get on to the property ladder. Affordability constraints and demographic changes have increased the share of privately rented housing and this sector's evolution has strongly contributed to the rapid growth of the buy to let sector in recent years,’ she explained.
‘Repeat issuers and new players will support a robust pipeline of buy to let RMBS deals this year. Issuance for this segment has accounted for 25.6% of total UK RMBS issuance so far this year, up from 10.2% in 2014,’ she added.
Over the coming months, Moody's forecasts that reduced demand for buy to let properties will soften UK house price growth. Moody's forecasts that UK house prices will nonetheless rise by up to 5% in 2015, albeit at a slower pace than in 2014.
‘Notwithstanding the softening in house price growth, the risk of an immediate house price decrease is limited given the housing shortage and the economic recovery,’ Rombeau pointed out.
According to the Moody's report, the buy to let market has grown at a steady pace since early 2010, accounting for 16.8% of total gross mortgage lending and 25.3% of total house purchases as of the first quarter of 2015. Buy t let gross lending volumes have substantially increased, rising to £7.6 billion in the first quarter of 2015 from £2 billion in the first quarter of 2010.
Paragon, the UK's largest buy to let specialist, has accounted for around 40% of buy to let issuance since the financial crisis, with a total of nine transactions collectively worth £3.2 billion, the report says.
Mortgages also entered the buy to let securitisation sphere this year; the recently established specialist lender has already completed two buy to let transactions for a total amount of £426 million since January 2015.
Moody's research says that, while UK house prices increased by 3.5% in the first half of 2015, according to data from the Nationwide, most regions, except for Northern Ireland and Yorkshire and Humberside experienced a further slowdown in annual price growth in the second quarter of 2015. The monthly year on year growth in UK house prices gradually declined to 3.3% from 11.8% in the 12 months to June 2015.
David Whittaker, managing director of Mortgages for Business, said that his firm has found that since the tax change announcement in July both mortgage lenders and landlords are still extremely optimistic about the private rented sector in the UK. ‘Changes to the tax system will not change the fundamental drivers of growth in the buy to let industry. Demand from tenants remains strong and healthy rental yields are providing a powerful incentive for further investment in homes to let,’ he explained.
‘Landlords make investments over the medium to long term, so will be able to consider these changes carefully between now and when they come into force which will not have happened completely until the end of this decade,’ he pointed out.
‘However the most important factors for landlords considering where, when and how to invest will more than outweigh considerations of tax relief on mortgage interest. Where these changes are a significant issue, this subset of landlords have years to consider forming limited companies in order to retain their current tax relief. Any transitionary hiccups as the changes come into force will likely be followed by a more positive correction soon after,’ said Whittaker.
He pointed out that buy to let mortgage lenders understand how landlords and the private rented sector work. ‘These lenders will be able to cater to the needs of landlords as they change. There are already well over a hundred different buy to let mortgage products on offer for limited companies, and this is before lenders start to innovate in response to changes in the tax treatment of the sector,’ he added.
‘If buy to let lending takes a different path to what might have been expected, or indeed if house prices slow or accelerate, this will be down to bigger financial currents than this sole technical issue of taxation,’ he concluded.