Gearing a Priority for Buy to Let Investors

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Buy to let investors are paying increasingly close attention to the gearing of their portfolio, according to Paragon’s latest PRS Trends research.

Paragon’s research, based on interviews with 203 experienced landlords, found that landlords of all sizes are looking to reshape their portfolios. The average portfolio gearing fell from 35 per cent in the final quarter of 2017 to 32 per cent in the first quarter of 2018. This figure falls significantly below the peak of 43 per cent in 2012 and marks the lowest point seen since Paragon began tracking gearing in 2001.

An effective use of gearing has been a way for many landlords to ensure that they get the best from their buy to let properties as the interest element of their mortgages as always qualified for tax relief, making paying this off less important. However, the rules enabling landlords to offset their mortgage interest against tax are being phased out. This will mean that landlords will only be able to claim back a basic tax rate reduction of 20 per cent off their bills.

Additionally, approximately a quarter of landlords (24 per cent) reported that they had increased rent in the last three months. They had also been spending an increasingly large proportion of their rental income on mortgage costs. Landlords spent up to 30 per cent of their income on mortgage costs in comparison to the 26 per cent at the end of 2017.

Managing director of mortgages at Paragon, John Heron, explained: ‘Our latest survey demonstrates how tax and regulatory changes are beginning to drive changes in landlord behaviour, with evidence of polarisation between small landlords and those with more substantial portfolios beginning to emerge. Our own experience highlights that landlords with larger portfolios need access to products that cater for landlords with more complex requirements and broader underwriting expertise, increasing the role for specialist lenders in the buy-to-let market.’