Last month the UK lost its AAA credit rating from Moody’s to an AA1 rating. Dean Velani, the NLA’s Parliamentary Officer, reflects on what this could mean for landlords.
According to Moody’s, the UK’s “subdued” growth prospects and “high and rising debt burden” are weighing heavily on the economy and, as a result, the credit rating agency has opted to reduce the UK’s credit rating to AA1, with other agencies including Standard and Poor’s and Fitch expected to follow suit.
Whilst this has a great many consequences for the UK at a national and international level, it is sure to have an impact on families and businesses of all sizes, including landlords and property investors.
In essence the ratings provided by Moody’s and their ilk are no different from the type of credit reports landlords order to assess prospective tenants, they are a rough indication of whether or not the subject is ‘good for it’ . i.e. will they pay me what they owe. In the case of the UK’s rating it means that lending will become slightly higher risk and therefore slightly more expensive for the Government, trickling down to effect the cost of other credit eventually.
This all means the downgrade will only reaffirm lenders’ caution and could mean that landlords find it increasingly difficult – if that is possible – to access affordable finance. In the last year 32% of landlords have not been able to expand their portfolio due to difficulties accessing buy-to-let finance. This figure could well increase as a result of the credit rating downgrade.
And reading between the lines, interest rates on existing lending are likely to increase. Whilst George Osborne claims that “the UK’s creditworthiness remains extremely high”, it is likely that it will become more expensive to borrow money.
Whilst the Chancellor is seemingly sticking to his guns on his economic plan for economic recovery, his strategy isn’t going as he had hoped and we may well see a change of course. In fact, Tory backbenchers are upping calls for cuts in next month’s Budget.
If the Chancellor were to restructure his economic plans, we could see further cuts to welfare. This will serve to stretch benefit recipients’ finances further and could lead to increased rental arrears and thus encourage more landlords to exit the LHA market.
Changes to the economy could also bring tax reform, in particular the removal of tax exemptions. This is not the news landlords want to hear as local authorities are discussing reduced council tax benefit for empty properties.
The future looks pretty grim for investors, landlords and tenants alike but the true impact of the credit rating downgrade will become clear in this month’s Budget. All eyes really are on George Osborne.
Against this backdrop, for the NLA’s roundup of the Budget, keep an eye on the press and campaigns pages and we’ll be blogging about it too!