The buy-to-let market has been a success story in recent years. But it now faces new challenges with a greater tax burden on landlords who borrow to invest in property and uncertainty about the impact of regulatory intervention.
In this month’s Council of Mortgage Lenders (CML) newsletter the CML looks at how new rules and regulatory changes may affect buy-to-let investors.
Here are the highlights of the article.
Strong recovery from a low base
The recovery has seen annual buy-to-let lending increase from a low point of £9 billion in 2009 to £27 billion last year. However, in absolute terms, buy-to-let lending for both house purchase and remortgaging is still some way short of its peak levels in 2007. And within the overall picture of strong growth, the expansion of buy-to-let remortgaging has been stronger than lending for house purchase.
Other data show that:
Buy-to-let has grown from around 9% of all lending for house purchase in 2010 to 14% today (in 2007 it accounted for 17%).
Arrears on buy-to-let loans have been falling since 2009. The rate is now below its equivalent in the owner-occupied sector.
The strong growth of buy-to-let – and recovery of the private rented sector – have been supported by a range of factors including increasing numbers of young people in higher education, large inward net migration, reduced job security and availability of social housing, tightening affordability pressures on would-be owner-occupiers, and poor returns on pensions and investments. Within the lending sector, there has also been improved credit availability and increased competition between firms.
The buy-to-let sector has been the predominant recovery story in the mortgage market. Over the last five years, buy-to-let has accounted for more than 70% of the overall growth in mortgage balances outstanding.
But the medium to longer-term prospects for buy-to-let have suddenly become less certain.
Macro-prudential regulation
The Treasury is currently working on proposals to extend the macro-prudential tools available to the Financial Policy Committee (FPC) to address risks in the buy-to-let sector.
It may propose that the FPC should have powers to limit loan-to-value or debt-to-income ratios.
The mortgage credit directive
The government distinguishes between owner-occupiers, who are protected by the Financial Conduct Authority’s (FCA) mortgage rules, and investors who use buy-to-let mortgages.
When the mortgage credit directive was first proposed, the UK successfully negotiated an opt-out for loans to buy rental properties. But the government has extended the rules to cover a small proportion of borrowers with buy-to-let mortgages.
The directive comes into effect on 21 March next year, when new consumer buy-to-let loans will be supervised by the FCA. It is possible that some lenders, particularly small and medium-sized firms, may be cautious about offering consumer buy-to-let mortgages.
Tax changes
Tax changes affecting buy-to-let landlords – which are being introduced over a five-year period – have created another source of uncertainty. The measures are likely to deter some landlords from expanding their portfolios and may encourage others to reduce their property holdings. They could also lead landlords to increase rents to cover some of their additional tax liabilities.
Conclusion
Over the last 15 years, buy-to-let has made an important contribution to the expansion of the private rented sector. But there is now considerable uncertainty over the impact of regulatory and fiscal proposals on both buy-to-let and the private rented sector.
Lenders accept that regulatory authorities must have the right tools to address any macro-prudential risks. But we urge the government and other authorities to consider the effects of uncertainty on the market and, in particular, the potential for a series of reforms to have cumulative, unintended and perhaps damaging consequences.
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