Landlords Now Facing Lower Rental Income

The harsher Buy to Let lending legislation coupled with the new tax rules for landlords has contributed to landlords selling off their portfolio, and subsequently, has had both positive and negative influences on the UK property market.

Last March, buy to let properties saw an 80% increase compared to the previous year. This was a result of the government enforcing a new 3% stamp duty land tax in April on second homes and buy to let properties. With a rush to purchase and avoid the 3% tax, this meant that new rental properties were now available, and the greater the supply, the lower the rental that a landlord can charge in a particularly congested area.

The increase in new homes available to rent decreased, the average rent by 0.2% nationally, with the biggest decline being 2.3% in the Southeast region. The London market saw a monumental 3% decline in rental prices on the year from September. As young people look for more affordable property outside of the London and southeast area, rent prices are actually increasing elsewhere. In the northeast rental prices increased to 564 per month on average, an increase of 2.6% since 2011, according to Rightmove.

Since the rush before the new stamp duty land tax in April 2016, there has been a new player in the property-owner game: the new tax rules. Introduced in 2017, landlords can only offset 75% of their mortgage interest against their profits. By 2020, landlords will not be able to offset any of their mortgages interest. For many landlords, this means that what they charge in rent, without the tax relief, will not cover their mortgage and it could actually cost the landlord to have tenants.

What are Landlords doing about the new Tax Legislation

The new tax legislation and the consequent cut to a landlords income, has buy to let owners rethinking their investment. With more owners contemplating selling off properties and therefore supply declining again, it is natural to expect that rent prices might start to increase again soon. In the current market, the renter is now in the drivers’ seat. With landlords usually unwilling to leave their property vacant, renters are able to negotiate a reduction in cost, especially if they are willing to sign a year-long lease.

Landlords are Selling Off their Portfolios

As many landlords look to areas other than London and the Southeast to invest and more landlords are selling off their properties to avoid the tax changes, it’s likely that we will see rent prices increase again soon. However, it does give a short window of opportunity for some of the 4.7 million households renting in England an upper hand for actually purchasing a property. As more buy to let landlords decide to sell, there will be a higher supply for people who have been considering getting on the property ladder.

The amount of people renting has dramatically increased in the last 20 years as first time buyers and millennials are priced out of the market. Although the decline in current rent prices is a small window for optimism for both buyers and renters, the lower rental income for landlords might come as a difficult shock for renters. Some landlords will have to increase their prices above market value to stay afloat without the tax breaks. So, although the current situation is seemingly positive for tenants and bleak for landlords, without a sustainable solution to the housing supply, renters and buyers will continue to struggle with affordability.

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