Have last year’s BTL changes levelled the playing field as intended or simply caused problems of a different sort? A Mortgage Strategy roundtable highlighted pros and cons in the new environment
There is no doubt that mortgage market news in 2016 was dominated by buy-to-let, with what felt like a never-ending stream of fiscal and regulatory changes either imposed or scheduled to follow. From the stamp duty surcharge to interest relief cuts and stricter underwriting rules, landlords may feel that the Government has had it in for them.
It was said in official circles that the intention behind the changes was to even out the playing field, making house purchase more accessible for first-time buyers and preventing landlords from buying up the supply of properties across the country. But many say these policies have backfired, with no winners emerging at all.
Following on from a Mortgage Strategy BTL roundtable held late in 2015 – before the stamp duty surcharge was imposed – we sat down again with four key market figures to discuss how the changes had impacted them and their clients, and to hear their predictions for 2017.
The panel (clockwise from top left)
David Whittaker, Managing director, Mortgages for Business
John Heron, Managing director, Paragon Mortgages
Adrian Moloney, Sales director, Kent Reliance
Andrew Montlake, Director, Coreco
2016 was certainly a tough year for buy-to-let. How is the market coping with the changes made so far?
Whittaker: The expectation for the year from Imla was about £42bn of completions, and Q1 was a rocket start with the stamp duty deadline looming. Q2 and Q3 were quiet, with Q4 just slightly up on that.
Our estimate for the year is £40bn, so that’s quite a close figure.
Heron: It’s very much been a year of two halves. We saw very strong completions towards the back end of 2015 and into Q1, while activity levels have settled down considerably. And if it wasn’t for remo you’d be seeing much lowerlevels of activity.
In particular, we’ve seen purchase transactions funded by BTL reduced to around 6,000 a month compared to about 12,000 a month this time last year. Historically, we’ve seen 50 per cent of BTL business as purchases and 50 per cent as remo, for years; since April, it’s been one-third purchase, two-thirds remortgage.
Montlake: Remo BTL has gone through the roof. People are taking advantage of rates at the lowest they’ve ever been.
There are still a lot of people who want to buy so it’s been quite interesting for us. Our BTL business hasn’t dropped off massively but we have seen a lot of existing clients come back wanting to remortgage; to capital raise so that they can buy still. But a lot of that is switching from personal loan to limited company loan.
Moloney: The purchase market has slowed so our traction has been remo; people refinancing.
Interestingly, we’ve seen new customers looking to move to a limited company rather than our existing book looking to switch. If they do purchase, it tends to be in a limited company, but we are seeing traction from bigger landlords looking to switch from sole name into a limited company or partnership.
How are landlords dealing with the changes?
Heron: The interesting thing from a strategic level is what landlords are saying to us and to their own trade bodies: they feel under attack with the changes that have been made in fiscal and regulatory policy and they are voting with their feet; there’s no question but that they are buying fewer properties.
At the same time, however, one of the things you can’t see as clearly is the level of selling that landlords are engaging in. If they’re doing what they say they’re doing, they’re selling a few more.
The concern has to be that the combined impact from a social utility viewpoint is that there is less property to be let. With rental demand increasing, we are going to see high rental costs.
It’s probably also likely that we’ll see property occupied in higher density. We’re seeing some evidence of that in terms of the more complex property applications; we’re seeing HMOs.
While the Government started down this path looking at levelling the playing field between landlords and buyers, where we’re ending up is that tenants will be effectively paying the price.
Montlake: It’s a really muddled policy. On one hand, the dinner party buy-to-letters aren’t buying any more. They’re saying to us: ‘I’ve got one or two properties; I was going to buy again but I’m not now.’
But on the other hand, in theory that’s opening up property for first-time buyers – but not enough of it.
Whittaker: The crux is the failure to build enough houses in the first place. The previous chancellor used landlords as a convenient scapegoat for a lack of policy over successive governments, allowing him to have a massive tax revenue gaining exercise on landlords, a group he felt he could exert pressure on that wouldn’t attract a constituency in the public at large to protect them.
It’s an extraordinary piece of taxation and legislation. You have a business cost, so you’re entitled to set off a business expense. It is quite unusual that the Government got away with that.
Moloney: We’ve spoken to a lot of landlords and the feeling we got back is that there was still a considerable number of them who hoped that the tax changes would soften over the next four years. If you talk to them about whether they would move into a limited company structure, some have said they’ll wait and see because they’re not sure what’s going to happen.
Heron: There’s a lack of understanding about political policy.
It’s difficult for the Government to reverse any policy; it’s certainly difficult to reverse a policy where the object is the landlord, who doesn’t garner a great deal of sympathy from the public at large.
There are no benefits here for owner-occupiers but clearly we’re going to see a shift in the structure of finance for the private rented sector. We’re likely to see a lower level of activity from the ‘dinner party landlords’ and greater activity from professional landlords. That trend has started and we’ll see it pick up in terms of pace over the next four years as the fiscal changes start to bite.
Are there any positive aspects to the direction BTL is taking?
Heron: There is a changing shape of PRS and the BTL market as a result of the changes.
The most obvious shift will be towards a more professional landlord sector and that will require different solutions from lenders and intermediaries. Maybe it’s not a bad thing that we see higher levels of activity from professionals because you would hope that would deliver better solutions for tenants.
So is limited company lending the way of the future?
Whittaker: The general perception is that, for most landlords, a limited company for future purchases is the logical starting point, unless they get taxation advice that says otherwise. That should become the default option for purchasers of property that can be held over a number of years and it coincides quite neatly with the new stress-test arrangements applied by lenders that accommodate that.
The rights of offset for tax still reside within limited company corporate structures. That’s the general guidance but lenders and intermediaries are not giving that advice. They’re saying: ‘Here’s a guidance principle. Now go and get proper tax advice.’
That’s up to the landlord to secure as they’re acting in a business capacity, but some of the conversations have been truly shocking. Landlords have said they’ve spoken to their ‘bookkeeper’, but that doesn’t cover tax advice. Please do go and speak to a medium-sized firm of accountants who specialise in property taxation – because you’re talking about your future wealth.
That message still hasn’t filtered down adequately. We’re 18 months on from when George Osborne made the announcement and there are still people saying: ‘What do you mean? What’s happening?’
In some sense it’s the feed-down from the networks to all their ARs, to the smaller brokers working from home or in an office with only two or three folk.
Montlake: You can see the demand for limited company lending with more products coming in and more lenders in the market.
Heron: My concern is whether the new lenders know exactly what they’re doing, because corporate risk is not the same as personal risk.
The due diligence process that you should be going through to satisfy yourself that the lending is sustainable is considerably more complex. The detailed rules that the PRA foresees to be needed around that don’t come into play until pretty much the end of next year. So there’s an opportunity there for disorder in the market in the interim.
Have you seen evidence of confusion in the market, then?
Moloney: The bigger brokerages know where the changes are but it’s often the mainstream broker who hasn’t got to grips with it all. But people say now that tax advice and BTL mortgage broking go hand in hand.
Montlake: There’s stunning naivety across the market about this. Landlords have their heads in the sand; there are brokers certainly who don’t understand; and some lenders aren’t asking the right questions.
That’s something we all need to work on as an industry because these changes are coming thick and fast and there are landlords who, in two years’ time, are going to look at their income and say: ‘What the hell happened there?’ And they’ll go back to the broker and say: ‘You didn’t tell me about this.’
We have to ensure they’re getting proper tax advice and maybe even insist they get tax advice before looking at the product.
Whittaker: We’re kind of already at that point. If they’re buying a new property and choose to buy it in their own name, they sign a declaration to say they have taken tax advice and are happy with it.
That’s resulted in nearly 70 per cent of our purchase applications now being in a limited company.
Heron: I’m not sure that there’s as much ignorance around as you may imagine.
In our regular survey, we ask landlords: ‘What’s your level of awareness? Have you sought advice?’ And we’ve seen a steady increase in stated awareness. We’re up at about 80 per cent now.
Of course, it’s not good that 20 per cent are still ignorant.
We’re about four- or five-fold up on the year in applications through limited companies, so it’s a very material increase in proportion.
We also have very experienced landlords who have paid a lot for advice from some very fancy accountancy firms and have come back after many months and said: ‘You know what? The best solution is for me to increase the rent by 22.3 per cent over the next three years. That resolves my issue and I believe it’s achievable.’
Montlake: On a positive note, the new underwriting standards should be a good thing for the market and definitely a good thing for brokers, because landlords need advice.
Moloney: Also, the market has been dominated by two players for several years. But the split of the market, whatever size it will be, will change it in some ways to accommodate the new direction.
How long do you think it will take the changes to bed in?
Whittaker: It will take time for the market to settle down to the new horizons because the paperwork required by one lender will differ from that of the next lender and the poor landlord will feel as though he’s been smacked around, no matter how good his paperwork.
It will have an impact on lending volumes – probably not in Q4 2017, but Q1 2018 could look rather dull for those with ambitious lending plans.
Heron: It will be a challenge administratively for landlords, intermediaries and some lenders because everyone will reach their new approach at different times and different speeds.
Intermediaries are going to play a really important role in making that as smooth as possible because they know what the lenders require and what the outcome is likely to be.
Moloney: If you look back to the MMR and how that benefited intermediaries in the regulated world, a lot of this is almost ‘MMR for BTL’ and it plays to brokers.
Any final thoughts from you all?
Whittaker: We expect a small contraction in 2017, from £40bn to £38bn, and the year after a dropdown to the low £30bns. But the market shouldn’t be frightened of saying that’s not a bad outcome.
We’ve seen almost exponential growth in the past few years and you can’t always go upwards. Sometimes you have to retrench a little.
Moloney: I agree. If the sector goes into a more professionalised market, I think there will be a spike in completions in Q1 2017.
I think a lot of lenders will have had a busy last quarter of 2016 and that should carry them over.
Montlake: In London, a lot of people purchasing BTL are looking at long-term capital growth. So as long as they are ticking over they’re not too bothered for now. I think that’s why we haven’t seen much change in business. It’s important that we don’t get downbeat.
As lenders and intermediaries, we can deal with the change. What will come out of this is different and probably better advice. The BTL market isn’t going anywhere.
Heron: I expect we’ll see a polarisation in the market, with some lenders comfortable lending only to landlords with less complex affairs and small portfolios. Out-and-out specialists will regard this as what it is – which is an opportunity.
But I sincerely hope we see less change in BTL policy in 2017. I’d like a greater focus on housing policy.