Wednesday 8 July 2015 9:51 am

July Budget 2015 - changes to mortgage tax relief: Here's what to do now if you're a buy-to-let landlord

A major shake-up of the buy-to-let housing market could be about to take place, after chancellor George Osborne announced plans to change mortgage tax relief for landlords. 

In his Budget speech today, the chancellor said the relief will be cut to 20 per cent, from 40 to 45 per cent, in an effort to "level the playing field" between buy-to-let landlords and ordinary house buyers.

Experts suggest the move is a "significant change" for those with a rental portfolio – but how will it affect them? What's experts' advice? 

Grainne Gilmore, head of UK residential research at Knight Frank, said those planning to purchase a new property will need to factor the new rules into their calculations.

"This could affect the offers they are willing to make."

If you're planning on buying a property, consider how much your costs will rise, adds Phil Nicklin, real estate partner at Deloitte.

“This measure will almost double the effective cost of borrowing for a taxpayer on the highest rate of tax. Currently interest payments of £100 only cost £55 after tax relief, but will cost £80 from 2020. A landlord who borrows at even a modest level might end up paying more in tax than he makes in profit."
George Spencer, chief executive of online lettings agent Rentify, adds that those costs aren't just the obvious ones: they can also include high street lettings agent fees, home insurance, maintenance and repairs costs, as well as council tax and any ground rent.
"Mortgage interest relief often makes up a large proportion of deductible costs for landlords, and reduces their tax bills significantly."

But what of renters themselves? The measures "ultimately may backfire and hit people who are having to rent", warned Robert Walker, PwC's real estate partner.

"We could see buy-to-let investors feeling the squeeze and putting up rents. This would have a major impact on Generation Rent."

What next? Savills' Lucian Cook offers advice to landlords
  • Interest rates may rise between now and 2017
    Make sure you factor interest rate rises into your calculations when you consider what is a sustainable level of borrowing. "That may mean looking at rationalising your portfolio, it could have impacts on the nature of property that you buy, or it could push you to higher-yielding residential units," says Cooke
  • Now is not the time to take risks
    Work out where your comfort zone is when it comes to income return and profit margin. "A lot is about what you need to generate positive cash return from the rent – you're going to want to make break even plus."
  • Don't forget about voids
    Ensure you create a cash buffer to cope with the occasional vacancy
  • Reconsider those repairs
    "You're going to have to think pretty carefully about protecting your rental income," says Cooke – so consider expenditure on repairs and redecoration. "You might say let's cut back because we still need to make a profit when we haven't got the tax relief" – although he adds that undertaking essential repairs will keep rental income up.
  • Think long term
    "Fundamentally, you've got to protect your existing level of rental income. That suggests take a longer term view of how much debt you're prepared to hold against the asset."