Political unrest has created unprecedented uncertainty within the financial markets. The future landscape for investment and our pensions is unpredictable; so much hangs in the balance, change is inevitable but we don’t know when it will strike.
Many investors burned by the fall in interest rates and gilt yields following the EU Referendum have turned their sights to the buy-to-let market. Investment in property has represented an attractive, accessible option, and for some time, perception has been that it is a relatively safe haven. For one thing, unlike esoteric investments, the costs are tangible and bricks and mortar are easy to understand. People are actively ‘employed’ in their investment strategy, they feel they are in control which, in itself, is a comfort.
However, fresh unpredictability lurks even in housing because the reality is that new rules are soon to be implemented, designed to stem the numbers of new buy-to-let mortgages by up to 20% in 2018. The buy-to-let market has been earmarked by the Bank of England as posing a threat to the nation’s financial stability. For many landlords, rent barely covers the mortgage and a rise in interest rates is a real concern, particularly if house prices fall.
From April 2017, rules will be slowly phased over a 4-year period, which will prevent landlords from deducting mortgage interest from their tax bill. Their tax rate will be based on their gross income, including rent. Therefore, instead of having all interest deducted, mortgage interest tax relief will gradually be cut back to 20% between 2017 and 2020, as announced in George Osbourne’s Summer Budget. This will see more landlords become higher rate tax payers and is likely to deter some people from entering this market.
Dogged determination characterises the British public and true to form, stories are abound of buy-to-let landlords racing to take action to avoid their incomes being hit by the new tax rule. Many are reportedly setting up limited companies to house their property portfolios as this should mean the mortgage interest remains tax deductible. Others are transferring properties to other members of the family while some are hiking the cost of their rent.
We are living with the constant reminder that we should be prepared to live in uncertainty for some time to come. A prudent approach for all investors is acceptance of these conflicted times. This does not mean we must give up on financial security but it does say to me that we must be wholeheartedly prepared to be nimble-footed and flexible in our response to economic policy. Those who are undeterred by set-backs and have the nous to ‘work the market’ will fare well. I do not doubt that despite the overhauls, buy-to let will stay an attractive investment option for many.
The chief economist of the Bank of England is warning that the UK faces a sharper slowdown next year than initially forecast and that policymakers should not rush to raise interest rates. It is reassuring that caution is prevailing in these complicated economic times but this does not take away the requirement for us all to live a little more in the moment.