LETTING & ESTATE AGENT

Tinkering Around the Edges Will Not Change the Fundamentals

Tinkering Around the Edges Will Not Change the Fundamentals

From April 2017 there will be a staged reduction in mortgage tax relief on buy-to-let mortgages. By 2020, landlords will pay tax at the basic rate of 20% but figures suggest that many landlords will be unaffected by the tax relief changes.


Despite these changes, we firmly believe that our landlords are set to continue to make positive returns on rental properties. It is true that a current income after tax of £1,789 per annum would fall to £894 if rents remained unchanged. However, a realistic 5% per annum increase in rents would take income (after tax) to £1,858 per annum by 2020.

Adding on the full stamp duty costs (including the 3% stamp duty surcharge) to the cost of a mortgage still results in a profit by 2020/21. Based on this, the annual income would be £676 in five years with no rental growth (currently £1,625) or £1,640 in five years assuming 5% per annum rise in rents.

The thing of course with property investment is that the market is entirely self-balancing and driven almost exclusively by supply and demand. If for example, the market was to be affected and landlords withdrew, this would lead to lower rental stock levels. The clear result would be that rental values would be pushed up. This would in turn make the monthly yield figures more attractive to existing landlords and encourage investors to return to the market.

Many of the reasons that have driven such significant growth in the sector will endure. Factors may restrict supply, but they won’t alter the long-term demand for rental property. Government forecasts continue to predict strong growth in household numbers across the UK. All signs also point towards a further decline in the social rented sector.

Although first-time buyers are benefiting from a raft of government policies to help them onto the ladder, the reality is that home ownership still remains expensive (the average deposit is now equivalent to a year and a half gross income). Renters are therefore likely to stay in the sector for longer. Adding these factors together, we believe there is demand for the sector to grow by at least 100,000 new rental households a year in the UK over the next 5 years and possibly as many as 200,000. It is for this reason that we believe that landlords and first-time investors should continue to hunt-out opportunities as they present themselves.

 

Landlords and homeowners wanting to discuss their property investments are welcome to visit our offices on Mutley Plain or visit our website.