Many buy-to-let landlords will have been happy to see the end of 2016 in the hope that better lies ahead next year. After decades of bumper yields and rising rents, 2016 was the year the government put the brakes on the buy-to-let market.
The additional three percent stamp duty surcharge on second homes that came into force in April of last year was undoubtedly the headline change. This forced thousands of buy-to-let landlords to rush through purchases they had planned before the surcharge came in. The result was that £25.7bn of mortgages were agreed in March last year, representing a 59 percent year-on-year rise and a 43 percent increase on figures for February 2016.
However, there were also a number of other significant changes that rocked the foundations of the property investment market. New affordability checks were announced, obliging lenders to tighten their calculations when considering applications from prospective landlords. We also moved closer to the the mortgage interest tax relief cuts which will be phased in from April 2017.
So in the face of a barrage of detrimental changes, what can buy-to-let landlords do to find shelter in 2017?
Are interest-only mortgages the answer?
According to the National Landlords Association, the shifts in the buy-to-let sector mean most landlords now choose an interest-only mortgage; but unlike residential buyers, they do not plan a separate vehicle to repay the capital owed. Instead, landlords use the rental income from the property to pay off the interest before selling the property to repay the mortgage and make a healthy return.
Maximising monthly income
Mortgage interest repayments can currently be fully offset against rental income, but all that is set to change in April this year when the new rules are phased in. However, if you are a low rate taxpayer and only have a couple of properties; or you have a large portfolio and are able to offset costs through refurbishment expenses, the new regulations will make little difference to your returns.
While the tax advantages for higher rate payers may be disappearing, interest-only mortgages still allow landlords to boost their cash-flow. This could be an effective strategy for landlords looking to expand their portfolios and finance other properties, as the lower overheads will leave more money to reinvest.
Alternatively, some landlords are choosing to invest the money they are saving on their mortgage repayments in a more profitable way. That could be by investing in a tax-free vehicle like an ISA and allowing it to grow, or investing in stocks and shares. Potentially, this could generate the capital required to clear the mortgage in full once the term is up.
About the Author
Carl Shave has been working in the mortgage industry for over 20 years. He started running his own mortgage broker 15 years ago and is the director of Just Mortgage Brokers.