Well over half of those investors who recently secured buy to let mortgages risk facing losses when mortgage interest tax changes make their full impact in 2021.
That’s the gloomy view of credit rating agency Standard & Poors; its report entitled Buy to Letdown? warns that 62.5 per cent of loans taken out from 2014 to 2016 will become loss making by 2021 when the tax relief changes conclude.
The report also says 81.1 per cent of investors who took out loans between 2014 and 2016 would struggle to maintain the same leverage if they applied today.
They would typically need to drop down the Loan To Value scale by 9.4 per cent in order to remortgage on a similar basis.
Before Bank of England-inspired controls were introduced in 2016, investors were typically stress tested against an income coverage ratio of 125 per cent.
However, now the stress tests by different lenders usually expect 140 per cent or more against a notional mortgage interest rate of 5.5 per cent.
And although investors in London and the south east have usually borrowed most, S&P warns that investors in northern England are actually most at risk as a result of low levels of rental growth in the region in recent years.
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Oh dear, more misunderstanding about buy-to-let dynamics. Many landlords will be accepting that they have to "top up" their newest mortgages, in order to acquire an asset with appreciating capital value, and a rising passive income stream which they can draw against in retirement. They may have to use taxed income to do so, but many will have mature buy-to-let investments which are already, and will remain, cashflow positive. If the world was over-flowing with investment opportunities where your capital was safe and there was a decent return, then buy-to-let would have competition.
These scare mongerings "suppose" all buy to let investors are totally clueless. BTL investors will have all manner of loans which suit there best needs now and who are well aware that this may not last. As soon as the loan situation fails then investors will change their tactics. Oft reported here is that far more properties are being bought for cash.
In any analysis you can not take the current conditions and project them forward unchanged. You have project likely future conditions and make a future analysis on future conditions. Of course this is too much like hard work for a quick prophecy in a magazine article.
I think this article makes a fair point. A lot of buy to let investors expect a positive cash flow after tax with the capital appreciation a bonus. The changes in the interest tax relief are going to pinch and the sneaky 'phasing in' means many won't realise until late in the day. And the risk of falling short on a re-finance due to stress tests given where values currently are is a real issue that can't be ignored. Investors in buy to let need to ensure they have resources to fill in the holes if there are any
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