Landlord action to avoid high tax costs could reduce ...

Landlord action to reduce higher tax costs could lead to a lower level of buy-to-let mortgage transactions going forward.

That is according to Paragon’s latest PRS Trends Report for Q1 2019, which tracks the experience of more than 200 landlords with an average of 12.8 properties and over 20 years’ experience in the UK’s private rented sector.

The quarterly survey found that while landlords in this group remain active in the sector, they are now prioritising measures to support financial strength over portfolio expansion.

It highlights how landlords have scaled back their buying intentions, reduced their reliance on mortgage debt and improved affordability by spending less of their rental income on mortgage payments.

For instance, the proportion of landlords looking to purchase property was 15%-20% before the announcement of tax and regulatory changes in 2015. That number has dropped to just 7%-10% today.

Average portfolio gearing – which measures the proportion of debt finance relative to a portfolio’s overall value – has fallen from 40% in 2014 to 33% today, with landlords who have three or more properties borrowing 36% of their portfolio value on average.

Meanwhile, mortgage costs as a proportion of rental income are down from 30% at the beginning of 2017 to 27%, which Paragon says is aided by landlords re-mortgaging onto lower interest rate and longer-term fixed mortgage deals.

The latest figures from UK Finance also highlight the extent of the switch in focus from house purchase to remortgage, with buy-to-let house purchase transactions in 2018 down by 34% to 66,400 compared with 2014 and remortgage transactions up 76% to 169,100 over the same period.

“The shift in focus from portfolio expansion to financial strength has driven a surge in buy-to-let remortgaging, with lower interest rates and longer initial fixed periods helping landlords reduce finance costs and lock in greater certainty.”

“However, it also extends the product maturity cycle, guaranteeing a reduction in the scale of opportunity to refinance buy-to-let mortgage deals over the next few years.”