IMLA has said the end of higher rate tax relief for buy-to-let landlords will limit the supply of rented properties and increase the rents for tenants.

Changes in the Chancellor’s summer Budget would mean the buy-to-let investors in the 40% tax bracket with a mortgage would no longer be able to deduct mortgage interest from rental income, significantly increasing their tax bill.

The Intermediary Mortgage Lenders Association (IMLA) have said these measures discourage investment in the private rented sector at a time when the population is increasing and a lack of homes is pushing up rents.

Key issues of the IMLA report in the mortgage market includes first time buyers, home movers, remortgage buyers, buy-to-let landlords and releasing capital.

The buy-to-let sector has had the most robust recovery but volumes remain 40% below the 2007 peak. IMLA say the sector is responding to rather than driving tenant demand in the private rental sector.

Benefits for owner-occupiers

The scrapping of tax relief for buy-to-let investors would increase the burden landlords which would push some into losses as the effective tax rate on their property is above 100%, according to the IMLA.

By ignoring the cost of mortgage interest, landlords must pay tax on the whole rental income. To make buy-to-let viable, landlords would need to reduce the price they are prepared to pay for a property.

For first time buyers and home movers the change could mean a fall in property prices and less competition to buy a new home.

In the shorter term buy-to-let landlords may increase the rent charged to tenants in anticipation of the legislation in the Finance Bill 2015-16 which are currently awaiting the second reading.

Landlords may also decide to reduce their mortgages, sell properties or establishing companies as a way to avoid the tax.

Conditions right for remortgage resurgence

According to the IMLA as the buy-to-let sector has rebounded their have been few remortgage buyers. Figures for the first quarter show remortgage volumes were up 11% for the quarter and the highest growth since 2009.

This may have been helped by the largest difference between standard variable and discounted variable rates of 3% with more mortgage deals from lenders.

Equity in homeowner properties is now at £5 trillion although only 20% of gross UK housing wealth is mortgaged, the lowest level since the early 1980s.

Homeowners are less likely to access cash for broader consumption and instead they have ploughed £13.7 billion of equity into home improvements.

For older equity release buyer, considerable value in their property allows them to access money using a lifetime mortgage to consolidate debt, holidays or give to a family member.

Peter Williams, executive director of the IMLA said when comparing the market segments first time buyer volumes have been the best from 2007 to 2014 falling by 53% following the recession.

This compares to buy-to-let reducing by 81%, remortgage buyer volumes falling by 60% and home movers by 56%. However, homeowners and renters will remain vulnerable until policymakers tackle the chronic lack of supply of new build homes.

What are your next steps?

Call our LCM mortgage brokers if you are a buy-to-let landlord with a property, remortgaging and want the best mortgage deal, buying your first home or you are planning to move home.

Learn more by using the mortgage cost calculators, property value tracker chart and equity release mortgage calculator. Start with a free mortgage quote or call us and we can take your details.

For equity release buyers our London City Mortgage advisers can recommend lifetime mortgages allowing you to receive cash from your home to spend on anything such as improve your quality of life or even buy a more expensive home.

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