Under the currently system landlords can claim back up to 45% tax in mortgage interest costs, but Osborne said this has given landlords too much of an advantage over homeowners.
By 2020 the amount claimed will be restricted to 20%, although the government said this will be phased in on a gradual basis.
Osborne said: “Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income whereas homebuyers cannot and the better off the landlord the more tax relief they get.
“All this has contributed to the rapid growth in buy-to-let properties which now account for over 15% of new mortgages, something the Bank of England warned us last week could pose a risk to our financial stability.
“So we will act, but we will act in a proportionate and gradual because I know that many hard-working people who’ve saved and spent in property depend on the rental income they get.
“So we retain mortgage interest relief on residential property but we will now restrict it to the basic rate of income tax and to help people adjust we will phase in the withdrawal of the higher rate reliefs over a four year period and only start withdrawal in April 2017.”
From April 2016 the wear and tear allowance, which allows landlords to reduce the tax they pay (regardless of whether they replace furnishings in their property) will also be replaced by a new system that only allows them to get tax relief when they replace furnishings.
Osborne explained that the priority was to create a level playing field for homeowners and landlords.
He added: “We will create a more level playing field between those buying a home to let and those who are buying a home to live in.
“This is a government that is unwavering in its support for homeownership.”
Henry Woodcock, principal mortgage consultant at IRESS, said: "The potential revenue generated by cutting the tax relief on buy to let mortgage interest was clearly a draw for the Chancellor, but it may trigger unintended consequences. Buy to let has been the key area of growth in the mortgage market, and changing its tax treatment is likely to dampen mortgage activity and demand from property investors, which will hit overall lending figures. Equally, we may see a number of landlords leave the market if their costs rise, which in turn will lower the potential revenue of the move.
“Finally, while this may slow house price growth, it may not be an unqualified success for first time buyers. For those landlords that remain in the market, they may need to increase rents to cover increased financing costs, and higher rents will make it more difficult for prospective buyers to build their first deposits."
Adrian Anderson, director of Mayfair-based mortgage broker Anderson Harris, said: “There had been fears among landlords that relief on mortgage interest payments for buy-to-let landlords would be completely abolished so while the changes will hit higher-rate taxpayers, it is not as bad as it might have been.
“It is only fair that there is a more level playing field between first-time buyers and landlords but if this tax break had been completely withdrawn, buy-to-let would have been far less attractive to investors. Thousands of landlords may well have struggled to keep up repayments on their mortgage or struggle to pay the tax, especially when interest rates rise.
“It is too simplistic to blame landlords snapping up rental properties for the property shortage. People have to live somewhere, and if they can’t afford to buy, then they must rent.
“With many first-time buyers struggling to get on the property ladder and growing families unable to find the housing they need, housebuilding should be at the centre of the government’s strategy so we look forward to see what further planning reforms are proposed. Detailed plans are required as to how effective changes will be achieved.”
