Many buy-to-let landlords remain unaware of new regulations that could adversely affect their businesses.
It is now six months since the introduction of new Prudential Regulatory Authority rules that require lenders to impose more robust underwriting processes for landlords with four or more mortgaged properties.
But this is only part of the regulatory and tax changes landlords have faced recently. At the start of 2017, the PRA required lenders to apply new stress tests, potentially limiting what some buy-to-let investors could borrow.
At the same time, the Government is in the process of reducing the tax relief landlords can claim on mortgage interest payments. It has also introduced a higher stamp duty surcharge on additional property purchases.
These are wide-ranging reforms, with the potential to have an effect on both the profitability of existing buy-to-let investments and the ability to remortgage at a competitive rate.
Importantly, many of these changes will have the biggest impact on smaller-scale landlords — while those who own through a limited company structure will experience far more limited effects.
But evidence suggests a significant proportion of these smaller-scale ‘portfolio’ landlords have yet to seek professional advice about these changes.
A recent survey by Mortgages for Business highlights the extent of this problem. The specialist broker’s Property Investor Survey found that more than half of landlords surveyed — some 54 per cent — had not sought advice about these tax and regulation reforms.
Mortgages for Business chief operating operator Steve Olejnik says this finding is “concerning”. He says: “We are doing a number of education initiatives, as are others in the industry.”
But despite these initiatives, he says the reality is that some landlords will only realise the full effects of these changes when they come to remortgage. Many in the industry are urging brokers to contact clients to discuss issues ahead of this stage.
This is particularly pertinent at present, with a significant number of landlords expected to refinance before the end of the tax year. This is because of changes to stamp duty. The stamp duty surcharge on second homes was introduced in April 2016.
Not surprisingly, this created a bulge in sales, with landlords looking to buy before this additional charge came in.
Many of these buyers will have opted for the cheaper two-year fixes that were around at the time. These deals are now maturing, but some landlords will find they cannot refinance on the same terms.
Next year the effect will become obvious
At the same time, those filling in a tax return may start to see the effects of this partial withdrawal of income tax relief, although next year the effect will become more marked.
Bricklane.com chief executive Simon Heawood says: “The impact of this policy assault on individual buy-to-let has started to wash through the market. As new tax returns are filled in and fixed-term mortgages come up for renewal, many landlords are recognising that the sums no longer add up.”
The question is, what do they do about it? Do they try to seek advice from brokers about alternative finance deals? Do they stay with the same lender, and accept higher rates? Or do they look to incorporate, and try to avoid some of these additional tax changes?
Olejnik says this is one reason why landlords need time to review their situation. He adds: “Landlords will need to talk through the options with both their mortgage broker and a tax accountant.”
He adds: “More than one in two landlords have not sought this kind of advice. But it’s clear from those who have that one of the main questions is whether they should incorporate or not. Landlords want more information on the merit of transferring their properties and re-purchasing them through a limited company structure.”
He says those that go down this route may incur capital gains tax and stamp duty charges when transferring existing properties, although there is the potential to save income tax later.
Olejnik points out that landlords with more substantial property portfolios may qualify for relief on stamp duty, plus CGT deferral, but this option is not open to most smaller-scale landlords.
He adds: “As a rule of thumb, it may not pay to incorporate if you have only three or four properties. But it may make sense for future property purchases to be bought through a limited company structure.”
Smaller-scale landlords need additional documentation
Tougher underwriting criteria is also slowing down the remortgage process. These new PRA rules mean many smaller-scale landlords need additional documentation and verified business accounts to enable lenders to conduct a more thorough analysis on their portfolio.
Research by Foundation Home Loans has found this has slowed things down and made it harder to get finance. Their survey found seven out of 10 portfolio landlords had found it harder to find a mortgage since the rule changes.
Although these changes primarily effect those with four or more properties, tougher underwriting requirements are also having a knock-on affect. Half of those owning between one and three properties also said they had found it harder to refinance their property in the past six months.
Landbay managing director of intermediaries, Paul Brett, says he is aware of a “lot of anxiety” in the broker market around these issues. He says: “At a recent broker event there were a lot of questions about this. Brokers clearly want a more thorough understanding around all the tax issues to do with incorporation so they can provide a better service to their clients.”
Up to now the standard industry response has been to tell clients that they need to seek specialist tax advance. But this approach is no longer satisfactory.
“Saying we can only advise on mortgages and landlords need to get tax advice elsewhere is not good enough,” says Brett. “Brokers want to be able to provide more information to clients, and as lenders we should be looking to support them with this.”
He adds this doesn’t mean that brokers will be giving individual tax advice, or personal recommendations on whether landlords should incorporate.
But Brett does believe that they need more detailed information on these changes, and how it could potentially affect different clients. “There’s a lot of anxiety that if brokers don’t give clients the information they need, people may form opinions and pursue a course of action without having all the facts.”
Not a straightforward process
There is the danger that a year or two down the line landlords may come back and criticise brokers for not recommending a certain course of action.
Mortgage brokers clearly need to work in partnership with local accountants and tax specialists. But this isn’t always a straightforward process.
Brett says: “There will be a lot of accountants who are fully up to speed with these reforms. But equally there will be others who only have a few clients where this has applied, so it may not be on their radar. Brokers need to have a good understanding of the accountant’s understanding of these changes.”
These PRA changes also make it more complex for brokers to arrange refinancing. There may be larger buy-to-let lenders who are not prepared to offer remortgage deals, thanks to tougher lending criteria.
Changes a boom for comparison engines
Brett says: “Brokers really have to get to grips with the variety of specialist and smaller lenders in this market if they want to provide an effective service for clients.”
This includes smaller specialists such as Landbay, Vida Home Loans and Foundation Home Loans, who have slightly different underwriting requirements, giving brokers the flexibility they need across their client base.
Brett adds: “These changes will certainly prove a boom for comparison engines, such as Knowledge Bank and Criteria Hub. But it will take time for these services to gain traction. My worry is that brokers will turn away business if the first page of these sourcing systems shows the larger lenders are not able to provide finance, thanks to these more arduous underwriting restrictions.”
But despite this, many in the industry believe that the combination of tighter underwriting and a more complex tax position may actually benefit the broker sector.
There have been questions about whether a typically 0.5 per cent charge can be justified on more “vanilla” loans. But most agree that such charges are certainly earned in the buy-to-let sector, where the level of skill required to assist clients has increased, as has the time taken to gather the required information and source products from a more sophisticated and complex lending market.