The buy-to-let market is undergoing genuine transformative change, with the last three years bringing increased regulatory intervention in the market.
After the general overhaul of the stamp duty system in 2014, the government added a 3 per cent surcharge on second homes in April 2016. From April 2017, buy-to-let landlords can now no longer reclaim the full amount of mortgage interest paid on their tax return.
On 30 September of this year we will see additional change in the shape of the PRA’s second tranche of underwriting guidelines, due to impact investors with larger portfolios.
The constant flux has left some landlords feeling unduly targeted and many in the market wondering what lies ahead for the future of buy-to-let.
Education and caveats
These issues are far-reaching in scope and controversial in nature. Here at Shawbrook, we commissioned economic think tank, the Centre for Economics and Business Research (CEBR), to take a current and future view of the private rented sector and in particular the buy-to-let market.
The report highlighted some important areas for further discussion. This led Shawbrook to put together a group of leading property experts to debate the issues in the report and also to give their views on buy-to-let.
What we discovered is that despite there being some understandable pessimism – with regulatory change potentially pushing smaller landlords out of the market and continuing political uncertainty – the data indicates that buy-to-let remains a well-capitalised investment, rewarding thoughtful investors who seek specialist advice.
However, this comes with a caveat. Lenders and intermediaries have a tremendous responsibility to work together to ensure that all landlords are fully aware of the hurdles they will face as buy-to-let investors in the coming years.
To quote a much-overused but highly relevant line, it all comes down to “education, education, education”.
There are a growing number of well-respected industry figures concerned that landlords are not aware of the full importance of these changes. Indeed, the prevailing opinion seems to be that plenty of landlords could be sleepwalking into a potential problem.
From speaking to our Shawbrook broker partners during the last few months, a significant amount felt that their clients might not have seen an accountant or tax adviser recently and therefore may not even know about the changes.
Landlords with higher levels of borrowing could easily find themselves in a negative cashflow position by the time the mortgage tax relief changes have been fully implemented in 2020. Brokers are concerned that these landlords need to act now to mitigate the future impact of those changes.
Our brokers were keen to explore ways to reach out to their clients with regard to these considerations. Quite understandably, they are sometimes reliant on lenders such as Shawbrook to provide a guiding hand.
Clarity is key. Along with some of our contemporaries, Shawbrook acted early ahead of the PRA’s 30 September changes to underwriting standards.
We consulted our intermediaries on the key issues impacting their clients and also designed a guideline document for brokers, introducers and their client base which details the internal changes we have made at Shawbrook, as well as how portfolio borrowers (four or more mortgaged properties) may be affected in the future. We are happy to share this, so please contact us at firstname.lastname@example.org to request a copy.
Notwithstanding a more difficult environment, the fundamentals of the buy-to-let market remain robust and as an asset class it will remain an appealing investment with a combination of leverage, strong rental demand and long term capital appreciation.
As can be seen in the graph below, average monthly rents in the UK are expected to rise continuously throughout the next decade as is house price appreciation.
In the future, almost all data indicates that professional landlords will be best-placed to weather the changes. We may potentially see smaller investors exit the market altogether.
Whilst it’s impossible to predict the future, one thing is abundantly clear. The onus is on all lenders and intermediaries to provide the type of considered guidance that the specialist market is renowned for during this key period of transition. Education is king and it will remain so for the foreseeable future.
Karen Bennett is managing director of Shawbrook Commercial Mortgages