Buy-to-let market outlook

Buy-to-let market outlook

Rents rise at slow pace

A raft of changes, including steeper stamp duty charges, have proved challenging for many buy-to-let landlords, although rental inflation has still risen slightly over the past year.

The 3% stamp duty surcharge on second homes, including buy-to-let properties, was announced as part of the Autumn Statement in November 2015, and came into play in April the following year. Many landlords rushed to purchase buy-to-let properties before the surcharge was introduced, boosting housing supply for tenants.

This increased supply, combined with stretched tenant incomes, suppressed rental inflation in 2017. Rents rose by just 0.7% in 2017, according to Rightmove, the lowest rate of increase since 2014. The North East saw the highest climb in rents over the year, at 3.3%, whilst London saw increases of 1.2%. Rents fell in only two areas of the UK, the South East and Yorkshire and the Humber.

According to a report on buy-to-let by Kent Reliance, rents generally are rising much faster outside the capital, now that the affordability ceiling has been reached there.

Rents in many areas are likely to continue to climb in 2018, particularly as landlords seek to counter the effect of higher running costs. Buy-to-let owners not only face higher stamp duty bills, but have also had to contend with changes to mortgage interest tax relief. The relief is being gradually reduced over the next few years, so that by 2020 it will only be possible to reclaim tax relief at the basic rate of 20% for all tax-paying landlords, which means many higher and additional rate taxpayers will face steeper tax bills.

Spring spike in remortgages expected

The surge in buy-to-let property purchases in the run up to stamp duty changes in 2016 means that many landlords who took out two-year fixed rate deals then will be looking to remortgage this spring.

There may well therefore be a spike in buy-to-let remortgage activity at this time, as landlords seek to avoid moving onto more expensive standard variable rates.

All landlords should check when their existing deals finish, as taking advantage of current rock-bottom buy-to-let mortgage deals can help keep outgoings to a minimum. November's base rate rise is likely to see continued demand for fixed rate deals, as landlords look to protect themselves from potentially higher mortgage costs in future.

Outlook for the buy-to-let sector

The changing environment for landlords has dampened enthusiasm for the buy-to-let sector. Latest figures from trade body UK Finance, which represents the finance and banking industry, show that 6,600 new buy-to-let mortgages were taken out for house purchases in November last year, 1.5% fewer than in the same month a year earlier. Buy-to-let remortgage numbers were also down, with 13,500 new remortgages in the month, 3.6% less than in November 2016.

According to the Kent Reliance report, amateur landlords are leaving the market and the private rented sector is becoming more professional and business-like.

The lender warned however, that there is "a limit to the amount of interference" the sector can absorb before there is an even greater reduction in the supply of rental properties.