Discussions about the buy-to-let market have had a tendency recently to adopt a negative tone, but despite an avalanche of regulatory and tax changes hitting the sector, many argue that opportunity lies therein and that the market is simply taking on a new shape.
Over the past 18 months or so the BTL industry has faced one hurdle after another following a barrage of fiscal and regulatory changes, many of which were set in motion by former chancellor George Osborne.
The rationale behind the changes was to level out the residential playing field, putting some investors off the housing market and freeing up stock for first-time buyers.
Recent figures from UK Finance show that those acquiring mortgages for their first home borrowed 9 per cent more in June this year than in the same month last year, so this may be a result of the BTL clampdown.
However, house prices continue to increase and a lack of supply of homes is believed by many to be the prime reason that would-be FTBs struggle to buy.
The BTL changes are also having a negative impact on those they were intended to help as landlords look to offload some of the tax burden on renters, who in turn will find it more difficult to save for a mortgage deposit. The Royal Institution of Chartered Surveyors has predicted that rents will rise by 25 per cent in the next five years, compared with estimated property price growth of 20 per cent in that period.
The first major change to hit the market was the 3 per cent stamp duty increase for private landlords, which was applied in April 2016. Buy-to-let lending figures for 2016 showed a significant rush to purchase before the deadline and a considerable drop-off following it, but experts expect the true impact of the rise will not be felt until 2018.
Some commentators say a number of landlords have exited the sector, further contributing to a rise in rents as the number of properties available to tenants falls.
Countrywide research director Johnny Morris says: “The rush to beat higher stamp duty rates in April 2016 caused a spike in the number of homes to rent, but that has now worked its way through the market.
“The stock of homes to rent is now falling in the more expensive parts of the country because higher tax rates have dissuaded large numbers of landlords from buying. Ultimately this means fewer homes and higher rents.”
Some landlords are downsizing their portfolios. But landlords on the whole are savvy and most have taken advice and adjusted strategies accordingly
After the stamp-duty increase, a cut to mortgage interest tax relief was the next regulatory change to hit the landlord community. This will be gradually reduced to zero over the next four years.
From April, the amount of mortgage interest relief landlords could offset against profits was brought down to 75 per cent; next year it will be 50 per cent, and by 2020 they will no longer be able to offset any of their rental yields when calculating their tax liability.
The mortgage interest relief change only applies to private landlords and not to those who own property through companies. The amount of borrowing through private limited companies has inevitably increased, although not all lenders offer this type of lending.
David Whittaker, managing director of specialist broker Mortgages for Business, says that while some landlords will be put off, the market will simply shift in a new direction.
“Talking to our customers and reading the remarks on various landlord forums, it’s clear that some landlords are downsizing their portfolios,” says Whittaker.
“But landlords on the whole are a savvy bunch and most have taken advice and adjusted their strategies accordingly. However, we are seeing fewer enquiries from would-be landlords than previously.”
He says the increase in limited company borrowing has been considerable but the rise should only be temporary.
“I would expect lending to limited companies to continue to grow, although of course, there will come a point when this will level out,” says Whittaker.
“Our records show lending to limited companies has grown exponentially in the last two years but we are a specialist broker with many full-time landlord clients who have been quick to adopt corporate borrowing vehicles. The wider, more mainstream market is likely to take longer to move towards incorporation.”
The next hurdle for the sector to overcome is adapting to the underwriting standards changes lenders are required to introduce in line with two stages of rules brought in by the Prudential Regulation Authority.
The rules are intended to ensure lending remains affordable when rates rise. As of January, lenders were required to tighten their criteria for BTL borrowing, or ‘stress testing’. Now, lenders must ensure landlords receive at least 125 per cent of their mortgage costs in rental income. This was a requirement already applied by most lenders.
However, the PRA expects lenders to take into account the new changes to mortgage interest relief, meaning the majority of lenders may require landlords to have 145 per cent or more of their mortgage costs from rental income before they lend to them.
Secondly, as of 30 September the PRA has applied new rules to portfolio landlords, which have been defined as those with four or more mortgaged properties, and lenders are expected to request full disclosure of income and debts from landlord applicants.
Many feel that, as a result of several mainstream lenders bowing out of lending to portfolio landlords and gradually putting less focus on the BTL market, the sector is becoming more specialist.
Specialist lenders are stepping up to meet the more complex requirements
Buy-to-let lender One Savings Bank recently unveiled its lending requirements for portfolio landlords. Sales director Adrian Moloney says: “However you look at it, buy-to-let is becoming more specialised, a side-effect of the changes to stamp duty last year, a reduction in mortgage tax relief this year and the new PRA rules coming in from the last quarter of this year.
“We have fewer, but more professional, landlords in both size and scale, and their needs are changing as well. Specialist lenders are stepping up to meet the more complex requirements as incorporation remains high, accounting for 44 per cent of loan applications in the first quarter.”
There is yet another change afoot for BTL investors to digest. From April 2019, landlords will have to pay any capital gains tax within 30 days of selling a property, whereas up until this date it is paid at the end of the current tax year.
However, Moloney says that given all the changes, there are great opportunities for mortgage brokers who can advise clients on the new tax implications and borrowing requirements and more choice in the market.
“Compared to 2008/09, when 70 per cent of the market was done through two lenders, there is a lot more choice, and there is more advice and consideration that needs to be taken account of, and with that comes more opportunity. That opportunity for brokers is immense,” he says.
Survival of the fittest
Education of landlords on the various changes will be key to the market surviving the changes, experts agree, and although the latest private rental sector trends report from specialist lender Paragon showed that 88 per cent of landlords understood the impact of the tax updates, that meant that 12 per cent still did not, despite several of the changes having already been applied.
Peaks and troughs are inevitable in all areas of lending, and despite the beating the BTL sector has taken in recent times, there will always be demand for rental properties and therefore there will always be appeal for landlords. But while the regulation is key to a healthy lending market, it is felt that BTL has had its fair share.
Whittaker says: “Overall, tighter regulation in the BTL sector is a good thing; the Wild West attitude pre-credit crunch did much to harm economic stability. However, it is now time for the Government to wait and see how its raft of new fiscal and regulatory rules bed in before contemplating any further changes to the mortgage market.”