One in five landlords plan to reduce their property portfolios this year, according to an industry body.
It comes as a raft of government tax changes to curb buy-to-let in the private rented sector in recent years begins to bite, the National Landlords Association says.
The withdrawal of mortgage interest relief for higher and additional rate tax payers is making its members more cautious of the future, the NLA data shows.
Additionally, the banning of upfront letting fees for tenants has contributed to the highest level of intended property sales in 10 years, and a stamp duty surcharge has put off new entrants to the market.
Sell off: The NLA says one in five of its members plan to reduce their property portfolios in the next year
Charles McDowell, commercial director of mortgages at challenger bank Aldermore, said that while the NLA’s findings came as no great surprise, it had raised a more worrying concern about landlords ramping up rents, hitting first time buyers hardest.
He said: ‘From our perspective however, the most worrying comment in the report is that most landlords will increase rents before they sell, to cover the increase in costs, due to these changes.’
Richard Lambert, chief executive of the NLA, said: ‘More and more people are relying on this sector for a home, so it is vital that landlords not only provide a high standard of accommodation, but are incentivised to do so by the prospects of a reasonable return on investment.
‘It is our view that these policies are undermining the viability of many landlords’ businesses and removing the incentives to invest in residential property for business purposes.’
The NLA warns that tenants may end up paying higher rents and have fewer rental properties to choose from.
Mr McDowell of Aldermore said this would be ‘a disaster’ for tenants, especially those who are renting and have aspirations to buy their own home: ‘as ultimately it will affect their ability to save a deposit and get on the ladder’.
‘Our latest first-time buyer index found that raising an adequate deposit continues to be the biggest concern for first-time buyers across the UK and that one in three believe buying their first home will be an extremely difficult process,’ he added.
‘We have always believed that first-time buyers are the lifeblood of the housing market, but to have a healthy first-time buyer market, we need a healthy private rental market, not one that adds further obstacles to a house buying journey, which is already difficult for tenants and prospective first-time buyers.’
Triple whammy: Landlords have been hit by withdrawal of mortgage interest relief for higher and additional rate tax payers, a 3% surcharge and ban of upfront letting fees for tenants
Finances have become tougher for landlords over the past year as a range of tax reliefs have reduced and while obtaining a buy-to-let mortgage is more difficult.
Tax relief on mortgage interest has begun falling from a maximum of 45 per cent and by 2020 will be replaced with a 20 per cent tax credit.
The change means landlords are being taxed on their revenue rather than profit.
It follows a hike in the rate of stamp duty paid by landlords purchasing new buy-to-lets, with all purchases made from April 2016 incurring a three per cent surcharge.
Tightening up: Mortgage lenders have also got stricter with most now requiring rental income to cover mortgage payments by a ratio of 145% on an interest rate of 5.5%
Mortgage lenders have also got stricter. Most now require rental income to cover mortgage payments by a ratio of 145 per cent on an interest rate of 5.5 per cent – significantly more than the 125 per cent at five per cent that was typical this time last year.
The combined effect of the tax changes and tighter regulation has made it harder for landlords to invest, as some prospective purchases no longer stack up financially.
High house prices, particularly in London and the South East, are also a major hurdle for property investors, who typically need to raise a deposit of at least 25 per cent.
The squeeze has seen landlords refocus on where to expand their portfolios, with lower property values and more scope to raise rents from a lower base in areas such as the North West making this a more profitable prospect for investment than London and the South East.