After the usual round of pre-budget day leaks and speculation, the Chancellor announced three key measures affecting the housing market this afternoon:
What does it all mean for the Island market?
- The current stamp duty holiday will be extended, with the up-to-£500,000 “nil-rate band” for stamp duty now finishing at the end of June, rather than the end of March as originally planned. Consequently, until 30th June 2021, no stamp duty will be charged on a residential property bought for up to £500,000. Furthermore, in an additional and unexpected albeit more limited extension of the stamp duty holiday arrangements, until 30th September 2021, no stamp duty will be charged on a residential property bought for up to £250,000.
- The Chancellor also announced that first-time buyers will be able to qualify for a “government guarantee” on mortgages where they have a deposit of just 5%, to allow them to purchase properties up to a maximum purchase price of £600,000. Many big lenders are already backing the scheme, the aim being to help more first time buyers on to the housing ladder and to step out from being permanent renters.
- Buy to Let landlords who have incorporated into a limited company vehicle to avoid the restrictions on mortgage interest tax relief will be disappointed to see that corporation tax is to increase from 19 per cent to 25 per cent from April 2023. There will be exemptions and reliefs for smaller businesses with profits of less than £50,0000 so many landlords may well be spared the increase.
The current stamp duty holiday can save a buyer up to £15,000 in stamp duty, with the maximum saving being achieved for people buying properties at £500,000 or above. There had been fears that without an extension, many current agreed 'pipeline' sales would fail to complete by the 31st March, leading to chaos. Many solicitors have seemingly been unable to cope with their workload, and if that 'cliff edge' scenario had been left to happen, buyers and sellers would undoubtedly have been left high and dry, trying to renegotiate prices and save their house moves.
onal stamp duty holiday period, introduced for properties priced up to £250,000 and until 30th September 2021, was unexpected. As the chart shows, over 75% of house sales on the Island are under £300k with close to half being under £200k.
This extra tax break is therefore going to be very valuable for the local market. It will benefit more than half of all Island buyers and stimulate demand for first time buyer, investor and second stepper family houses.
The Chancellors intention is clearly to continue to give stimulus to the market as we emerge from the pandemic. Locally, we believe this will lead to strong demand from buyers and underpin house prices especially in the under £250k segment.
There is a current shortage of fresh properties to buy coming to the market. This is already leading to record prices being achieved in many roads when a nice house comes up for sale.
We have learned from all three periods of lockdown that is that there is nothing like being confined to your own four walls to make you decide you want to live somewhere else. We believe demand from buyers will be strong over the Spring and summer and Island prices in the lower price backets will rise.
Mortgage Guarantee Scheme
The Covid 19 emergency led to a dramatic fall in the number of high percentage mortgage loans available. At one point last summer, 90% mortgages were almost impossible to get, and 95% mortgages completely unavailable. While banks were falling over themselves to cut mortgage rates and lend to people with large deposits, mortgages for first time buyers, the self-employed and anyone furloughed were withdrawn. Even now there are very few low-deposit mortgages available, the Treasury saying just eight mortgage products with 95% loans were on the market in January. They are often seen as riskier by banks who have to hold more capital in reserve for high percentage advances.
Under the scheme, which will launch across the UK in April, the government will offer to take on some of this risk.
To help more first time buyers in particular get on to the housing ladder, the government will offer incentives to lenders, aiming to bring back 95% mortgages which have "virtually disappeared" during the pandemic, the Treasury says. Unlike 'Help to Buy' which is only for those buying a new build property, the new mortgage scheme is not restricted to first-time buyers or new-build homes, but there will be a £600,000 price limit.
Here on the Island, first time and second time buyers can be on limited incomes and there are very few new home developments where buyers can use the existing 'Help to Buy' scheme. This new initiative should therefore have a welcome impact in the all important 'up to £300k' segment. The upper limit of £600,000 won't be an issue for Islanders and the scheme should be a lifeline for some buyers to come out of long term rental into home ownership as well as making it easier for families to move out of one bedroom and smaller properties into larger family houses.
A mortgage eligible for a guarantee under the scheme will need to:
• be a residential mortgage (not second homes) and not buy-to-let
• be taken out by an individual or individuals rather than an incorporated company
• be on a property in the UK with purchase value of £600,000 or less
• have a loan-to-value of between 91 per cent and 95 per cent
• be originated between the dates specified by the scheme
• be a repayment mortgage and not interest-only and
• meet standard requirements in terms of the assessment of the borrower’s ability to pay the mortgage, for example a loan-to-income and credit score test.
The recent restrictions on mortgage interest relief for buy to let investors have led many to 'incorporate' and buy their rental properties within a limited company structure. Using this route allows investors to deduct the full amount of mortgage interest that they pay from their gross profit and pay Corporation tax, not income tax, on their net profit. They can also pay themselves personally in company dividends which can be tax efficient.
So, it was unwelcome news to hear that the rate of corporation tax paid on company profits, is to rise to 25% from 19%, starting in 2023. But Chancellor Rishi Sunak also unveiled a "small profits rate" to benefit small firms, maintaining the 19% rate for firms with profits of £50,000 or less and there will be a taper above £50,000, so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate. This means that most landlords will be exempt from the higher rates - for now at least.
But this tax hike is likely to affect the trend towards buy to let investors incorporating.
If you have any questions about how the budget might affect your property plans, please do get in touch and we will be delighted to try and answer your queries. Our expert valuers have all the latest Island data and housing trends at their fingertips, and we will be happy to offer you a FREE valuation, without obligation or fuss.