Landlords Bruised by U.K. Tax Rise May Face New Loan Limitsby
U.K. landlords claimed tax relief on $17.4 billion of expenses
BOE says buy-to-let loans could amplify home-price swings
The U.K.’s amateur landlords, already bruised by higher taxes when they buy rentals and lower rates of tax relief, could be facing a new blow.
Chancellor of the Exchequer George Osborne told lawmakers in October that Bank of England will get powers to regulate the so-called buy-to-let market as soon as possible. The central bank may move as soon as Tuesday’s meeting of the Financial Policy Committee to curb lending for rentals, Morgan Stanley analysts including Chris Manners wrote in a Nov. 20 note.
“If they do something, it will probably be along the lines of an equivalent to the LTI cap they put in place for residential mortgages,” said Philip Rush, an economist at Nomura International Plc in London. “The pressure has been removed by some of the other measures” that have been taken.
Governor Mark Carney moved to limit the riskiest loans to homeowners last year by setting loan-to-income limits for some mortgages. Lending to landlords soared afterward, leading Jon Cunliffe, the Bank of England’s deputy governor for financial stability, to warn that investors could amplify an adverse shock to the housing market because they might seek to sell their rentals.
The stock of U.K. mortgage lending for buy-to-let has increased to 200 billion pounds ($302 billion) from 65 billion pounds in the past decade and is growing by about 9 percent a year, Cunliffe said. The loans represent 16 percent of all mortgages and accounted for 80 percent of net lending over the past year. Borrowers are often required to only pay the interest each month.
Buy-to-let lending’s growth as a proportion of lending and falling mortgage spreads for landlords may prompt the BOE to take action, Morgan Stanley said. The central bank may also opt to tighten underwriting standards, the report said.
Amid fears rental owners were pushing up house prices, Osborne last week hiked the stamp duty tax paid by investors by three percentage points. The mortgage-interest tax break is also being cut to the basic rate starting in April 2017, he said in July.
Buy-to-let was attractive for landlords because they received as much as 45 pence back for every pound of mortgage interest they incur. That helped boost expense claims by U.K. landlords to 11.6 billion pounds ($17.4 billion) in the 2013 to 2014 tax year, according to a Freedom of Information Act request by Bloomberg. That’s almost 520 million pounds more than a year earlier.
Landlords were attracted by annual returns from rental income and value gains of almost 12 percent in England & Wales in the 12 months through October, according to LSL Property Services Plc. That compares with a total return of almost 6 percent from U.K. government bonds and 1.1 percent from U.K. equities in the same period.
Limiting buy-to-let lending will affect the wider housing market, according to Annabel Schaafsma, a managing director of structured finance at Moody’s Investor Services. Loan-to-value restrictions or debt-to-income ratios for landlords will slow the pace of lending, “softening house price growth in turn,” she said in an e-mail on Monday.
The decision to raise stamp duty for rental purchasers from April was surprising because it will also affect landlords paying cash for the rentals, said Phil Nicklin, a real estate tax partner at Deloitte LLP. “They’re not adding to property lending which is something governments tend to worry about,” he said.