Caught in a Trap
Cash is King
Cash landlords hit a record high.
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Historically more landlords buy properties with cash than owner occupiers, but their behaviour tends to be far more erratic as it is driven by commercial rather than personal motives. According to Countrywide’s Lettings Index the proportion of landlords paying in cash for a property reached 61% in January 2017, the highest since records began in 2007. Over the last decade the proportion of landlords buying with cash has steadily increased. In 2007, just 41% of landlords bought a home without a mortgage, a figure which peaked at 58% by 2010, before dropping back.
On average, landlords sell a home once every 17 years, which means as prices have increased, a significant amount of wealth has built up in the sector over time. This wealth is now fuelling cash purchases. But policy changes are having an affect too. The forthcoming tapering of mortgage interest tax relief, which is being phased in from April 2017, means landlords have less of an incentive to borrow. Although not all of them will face a higher tax bill, those in the higher rate tax bracket will. Given the relatively good returns on property compared with other assets, there is still likely to be interest in buying - but less need to borrow as the tax advantage disappears. So we might expect to see more cash activity throughout 2017.
London landlords are most likely to use mortgage finance, simply because of higher prices, while those in the North of the country are most likely to fund their purchase with cash. However it’s not just a regional story - cash purchases drive the top and bottom of the rental market with the middle dominated by mortgaged purchases. Over the last year almost two thirds of homes (65%) costing less than £125,000 were paid for in cash. Closely followed by the 64% of landlords who paid cash for homes costing £1,000,000 or more.
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