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Is the golden age of buy-to-let investments over?

This time last year, buy-to-let was the hot investment idea. The rental sector was booming, house prices were on the up and mortgages on second properties had become significantly cheaper and easier to get hold of following a tough period after the financial crisis.

The pension freedoms due to be introduced in April 2015 were expected to unleash a new wave of bricks-and-mortar investment as a generation of over-55s used their retirement savings to set themselves up as landlords.

What a difference a year makes

But 12 months on, things don’t look quite so rosy. The initial warnings were sounded by the Bank of England which, at the start of last summer, highlighted the risks posed to the UK economy by an overheating buy-to-let sector.

The Bank said that thousands of landlords could face serious problems if interest rates started rising and they found it harder to service their mortgages, or indeed if the house-price growth of recent years were to go into reverse.

Tax changes for buy-to-let landlords

This raised the question of whether the government would or indeed should intervene in the sector. The answer came in George Osborne’s summer Budget, when the Chancellor revealed that, from 2017, buy-to-let investors would see the tax relief they are allowed to claim on mortgage interest payments limited to 20% rather than the 40% or 45% permitted at present. But this wasn’t the only policy change the Conservatives had in store for landlords.

In the Autumn Statement, Osborne surprised most observers by announcing a significantly higher rate of stamp duty for second properties, including buy-to-let, which is due to come into effect in April this year. The tax on a £200,000 flat, for example, would be £1,500 at present but will rise by a factor of five to £7,500 in the new financial year.

Support for first-time buyers

The Chancellor said the policy was designed to ensure that would-be first-time buyers were not priced out of the property market by landlords or purchasers based overseas. However, reform of the entire stamp duty system introduced at the end of 2014 has led to a sharp decline in Treasury receipts from the tax, recent research has found, and it may also be the case that the government is attempting to recoup lost revenues by raising rates in this particular area.

More change on the horizon: the European Mortgage Credit Directive

But the bad news for buy-to-let keeps coming. In the spring, the European Mortgage Credit Directive will come into effect, adding an extra layer of bureaucracy to buy-to-let loans. It is not exactly clear what impact this will have on the availability and cost of landlord mortgages, but most brokers expect there to be a damaging effect.

A changed outlook

For anyone who has jumped on the buy-to-let bandwagon over the last 12 months or who is considering doing so, the outlook has been radically transformed. Owning rental property has always been a serious commitment given the obligations that landlords face and the potential risks of falling house prices and void periods.

Until recently, the healthy returns on offer have managed to offset these negative aspects. But, in a very short space of time, the idea of investing in buy-to-let has become far less appealing.