In October Savills came out with this excellent piece of research that is worth reading if you have the time; http://pdf.euro.savills.co.uk/uk/residential—other/buy-to-let-tax-relief.pdf
It assesses the impact of buy to let investments on the new rulings that came into play in last year’s budget.
Most notably the affect of removing tax relief on interest payments. This clearly only affects those “buy to let” investors with mortgage funding, and while the growth in Buy to Let lending has warranted the attention of the Bank of England, Savills analysis of CLG and CML figures indicates that only around 30% of dwellings in the private rented sector are backed by a Buy to Let mortgage. This figure has stabilised over the past seven years as equity rich investors and accidental landlords have played a much greater role. Buy to Let lending has supported just 28% of the growth in the private rented sector over this period.
Further analysis indicates that the average outstanding mortgage in the Buy to Let sector stands at approximately £115,500, whilst the average value of a property in the Buy to Let sector is c£214,000; representing an average LTV of 54%. This has contributed to relatively low levels of mortgage arrears in the Buy to Let sector which, having peaked in 2008 at 2.3%, of all mortgaged Buy to Let stock have now fallen back to 0.6% in the current low interest rate environment.
Taking these figures and doing some sums (now and 2020 when the relief is completely phased out) shows how net returns change;
Source: Savills Research
This then follows on to which parts of the market MAY be most affected by these changes. Savills said; “Higher interest rates combined with the restriction of tax relief on interest payments may push some demand to higher yielding markets where the interest cover is higher, but will limit the capacity for Buy to Let investors to invest in higher value, low yield markets across parts of London and the South.” However, investors appetite for such lower value, higher yielding property may be reduced where the Benefits Cap and Working Tax Credit reform have the potential to impact on the rental affordability of those in recent receipt of financial support from the state who make up a significant proportion of the private rented sector. This will put pressure on rents (and correspondingly constrain investor demand) in markets with higher numbers of housing benefit recipients.
Source: Savills Research
So to minimise the effects one needs purchase at relatively low absolute prices, with relatively high rentals, and therefore a generally higher yielding property. However, the quest for high yield should focus on relatively prosperous areas.
Thinking of areas like this, our recommended investment markets in Northamptonshire (eg. Kettering, Northampton), Leicestershire/Rutland (eg. Leicester, Oakham) and Lincolnshire (eg. Stamford, Peterborough) look very attractive markets to weather the impact of the above changes in tax relief.
Please do contact us to discuss investment opportunities.