Spotlight: Prime Rental Markets

Prime Rental Markets
 
Budget Reaction Restricting Interest Relief

28 July 2015, by Sophie Chick

What effect will the changes to the tax relief on buy-to-let mortgages have on buy-to-let investors?

 

To understand the potential effect of the changes to the tax relief on a buy-to-let investor it is worth looking at some potential case studies. We have taken the example of an investor buying a £500,000 investment property delivering a gross yield of 4.0% assuming that they borrow 50% of the purchase price.

In this theoretical example a 40% tax ratepayer, might have made a cash profit of around £4,125 prior to the budget, equivalent to 21% of the gross rental value.

Given anticipated rates of price and rental growth, interest rate rises and the full restriction on mortgage relief (following its phased introduction), an owner wishing to remortgage will find that this profit falls to just £1,700 or around 6% of the gross rent. Despite the capital growth and, given the risk of voids, this makes the investment look marginal in income terms.

For somebody looking to acquire the property at that date with a 50% LTV mortgage, the combined effect of restricted income tax relief and higher interest rates, could mean that it is not possible to operate on a break-even basis.

Correspondingly it seems likely that the loss of tax relief will temper the expansion of the buy-to-let sector, with mortgaged investors looking for higher yielding sectors of the market and the lower yielding prime sectors being dominated by equity rich investors with low loan-to-value requirements.

FIGURE 7

Buy-to-let investor scenarios

 
Figure 7

Source: Savills Research

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