Section 24 – feeling the pain
Section 24 was one of the most controversial changes to the buy-to-let market in recent years, and just one year in, we are starting to see the impact.
During my time working with the National Landlords Association I can recall lots of surveys taking place in the landlord community - all designed to gain an understanding about how landlords intended to adapt their businesses in response to forth coming changes and new legislation.
There was an overwhelming indication from most of these that landlords intended to exit the market, reduce their portfolios or restructure their businesses.
At the time, I doubted this, and found it rather easier to believe the research which indicated that in the majority of cases, the typical landlord would actually do nothing until they felt the pain from any changes. I’m afraid to say that’s exactly what we are seeing now.
Section 24, you see, has starting to bite, hard. And for some landlords it’s pretty painful.
Perhaps the most pain is being felt by traditional landlords that have built up their portfolios over the past twenty years using traditional interest only, buy-to-let mortgages. Often the strategy for such landlords would be to enjoy the monthly cash flow from their portfolios, with plans in years to come sell off their properties, paying back the capital borrowed and retaining any excess as profits.
The main point here is that capital hasn’t been paid down, and mortgage interest is a huge part of their monthly expenditure.
I was talking to one landlord just this week who told me that he is looking at sliding from a 90k a year profit to a 90k a year loss over the next 4 years - purely based on the introduction of section 24! His only options are to sell up or face bankruptcy.
To put this into perspective, if you are a Landlord with 75-100 properties, then its quite conceivable that your mortgage interest may be around 500k a year (based where I work in Yorkshire, at least). In that scenario, on last years’ tax return, 100k of that mortgage interest will essentially have been classed as profit, catapulting that landlord into higher rate tax brackets and eating into their actual income, which they have relied upon for the past how ever many years as their main income.
Whilst it’s difficult for people in general to have much sympathy for portfolio landlords who have enjoyed good profits for many years, the real point being missed is that there is more of them than you may think, and they house a lot of people! There is already a housing crisis in this country, and this is shaping up to become part of it.
In the shorter term, how is the market reacting? I think there’ll be some very interesting changes ahead.
I’m seeing traditional landlords looking to reduce their portfolios and sell properties off at 10-15% below market value. I’m seeing landlords looking at reducing portfolio’s down from 50 units to 10 in order to become mortgage free. I’m also seeing landlords finally exploring transferring the beneficial use of their properties into limited companies - at great expense - in order to avoid the legislation!
Interestingly landlords and investors are starting to change how they finance and invest, for instance collating and pulling together funds from trusted sources (friends and families) and turning their backs on traditional lending.
All of this is in response to just a 20% cut in allowable mortgage interest. As the scale continues to slide up, you can only imagine what we’ll be seeing in 2-3 years’ time. Interesting times are ahead.