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Buy to let more profitable than two years ago

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19/06/2018
Lower mortgage rates mean landlords are banking higher profits today compared to two years ago, despite tax and regulatory changes, according to a leading economist.

Tax relief on mortgage interest for buy-to-let investors is currently being phased down to the basic rate, with the changes predicted to leave some landlords struggling to earn as much from properties.

However, a sharp reduction in mortgage rates over the past couple of years means most landlords are now taking larger profits, even taking account of the erosion of tax benefits, according to Pantheon Macroeconomics.

The economists found the average two-year fixed-rate at 75% loan to value (LTV) on a buy-to-let mortgage fell to 2.37% in May, from 3.21% in May 2016.

Samuel Tombs, chief UK economist at Pantheon, said: “A buy-to-let investor refinancing a two-year fixed mortgage that they obtained in May 2016 will save £1,400 per year in interest payments, assuming that they have purchased a property of average value.

“After the tax reforms and the fall in mortgage rates, virtually all buy-to-let investors are better off.”

However, the market could take a turn if the Bank of England raises interest rates and mortgage costs increase.

Tombs added: “We do not expect the market to be hit suddenly by a wave of fire-sales by landlords this year.

“That could change as and when mortgage rates jump.”

Landlord sales could dampen house price growth

The economist noted that if only a small number of buy-to-let investors decide to put properties on the market, the balance between supply and demand could weigh on house prices – and this could be another prompt for selling.

It comes after the Royal Institution of Chartered Surveyors (RICS) last week noted a larger increase in supply versus demand, through the number of new estate agent sale instructions and new buyer enquiries.

Tombs added: “Many BTL investors purchased properties to benefit from capital appreciation, as well as to enjoy a steady income stream.

“The recent slowdown in house price growth might persuade them to liquidate their investments even though borrowing costs have fallen.”

The reduction of tax relief will most hurt landlords with high incomes and high ratios of interest payments to rental income, according to Pantheon.

Tombs predicts multi-unit investors are most likely to sell up, as their income could exceed the higher rate threshold.

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