Many people feel anxious and uncomfortable when getting themselves into debt and understandably this is why many of us strive to pay off our mortgages as quickly as possible. But financially, this is not always the best decision when long-term debt is used as a tool to create wealth.
For many landlords, effective use of gearing has been the key to getting the most from their buy-to-let properties, as the interest element of their mortgages - and remember many buy-to-let investors have interest-only deals - has always qualified for tax relief, and so paying it off has not been quite so attractive, not when the rental profit and home equity could potentially be used to acquire more investment properties.
But of course, that is all changing.
The existing rules that permit landlords to offset all of their mortgage interest against tax are now being phased out.
Once mortgage interest relief has been withdrawn altogether in 2020/21, the consequences of Section 24 will mean that landlords will only be able to claim back a basic tax rate deduction of 20% off their tax bill, which will eat into their rental returns.
As a result, landlords of all sizes are being forced to reshape their portfolios.
Paragon’s latest PRS Trends research, based on interviews with 203 experienced landlords, has found that landlords are paying closer attention to the gearing of their portfolio, with the average portfolio gearing falling from 35% in the final quarter of last year to 32%in Q1 2018.
This is significantly lower than the peak of 43% in 2012 and is the lowest level seen since Paragon started tracking gearing in 2001.
Meanwhile, almost a quarter - 24% - of landlords reported that they had increased rent in the last three months. They also said they were spending an increased proportion of their rental income on mortgage costs, up to 30% of income from 26% at the end of 2017.
John Heron, managing director of mortgages at Paragon, commented: “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.”