More and more buy-to-let landlords are choosing to sell their properties due to a combination of factors, including higher taxes, increased mortgage costs, and uncertainty over upcoming legislation.
Research by the estate agent Hamptons shows that by the end of this year, almost 300,000 more homes will have been sold by private landlords than purchased. The National Residential Landlords Association attributes this trend to rising mortgage costs and a tax system that has penalized landlords in recent years. Additionally, concerns about energy efficiency requirements and changes in the Renters (Reform) Bill are also contributing to the decision to sell.
In a Daily Mail article, they will delve into the four main reasons why landlords are exiting the sector and examine the potential impact on the property market.
The Reasons
- Higher mortgage costs
One of the key pressures facing landlords is the increase in mortgage costs. The average interest rate on a two-year buy-to-let fixed-rate mortgage has risen to 6.63% from 2.94% two years ago. This significant increase has made it more difficult for landlords to generate profitable returns on their investments. However, it’s essential to note that average rents have also increased over the same period, with the average rental income rising from £1,029 to £1,243 per month. This has helped offset some of the higher mortgage costs for landlords, particularly those with properties on interest-only deals.
- Tax changes
Tax changes implemented in 2016 have had a substantial impact on landlords’ profitability. These changes included a 3% stamp duty surcharge on second home purchases and a reduction in the amount of tax relief landlords can claim on mortgage interest. Previously, landlords could deduct mortgage expenses from their rental income before tax. However, this has been phased out, and now landlords receive a tax credit based on 20% of their mortgage interest payments. This change has led to higher tax liabilities, particularly for higher-rate taxpayers who previously received a 40% tax relief on mortgage payments. The tax changes have made some landlords reconsider their investment strategies and, in some cases, sell their properties.
- Uncertainty over energy efficiency requirements
There has been uncertainty surrounding the government’s plans to enforce minimum energy efficiency requirements for rental properties. The government has proposed that by 2025, all new tenancies in the private rented sector should be in properties with an Energy Performance Certificate (EPC) rating of at least C. Furthermore, the proposal suggests extending this requirement to all private rented homes by 2028. However, no official response has been provided by the government regarding these proposals, leaving landlords unsure about the timeline for potential upgrades. Despite the lack of clarity, property experts advise landlords not to be overly concerned about EPC requirements at present.
- The Renters (Reform) Bill
The Renters (Reform) Bill has caused some landlords to be spooked by the potential implications it may have for them. The bill aims to end Section 21, which allows landlords to repossess their properties from assured shorthold tenants without establishing any fault on the tenant’s part. Landlords worry that under the new legislation, the courts may be slow in processing legitimate possession claims, preventing them from easily regaining possession of their rental properties. However, property experts suggest that landlords should not panic and should evaluate their tenancies on a case-by-case basis. They emphasize the need to end any troublesome tenancies before the bill becomes law.
Conclusion
The growing number of landlords selling their properties is primarily driven by higher taxes, increased mortgage costs, uncertainty over legislation, and potential changes to energy efficiency requirements. These factors have made property investment less profitable and more challenging for landlords.
However, property market experts believe that while the trend towards selling has not worsened due to higher mortgage rates, this may change as more fixed-rate deals expire. It remains to be seen how these issues will impact the property market in the long term, but it is clear that landlords are facing significant challenges that are reshaping the buy-to-let landscape.