Buy to let is very much under attack. Changes here, changes there. What’s happened? What’s in the pipeline? What does it all mean?
Whitehall policy makers evidently have a master plan for residential buy to let (BTL). Their objective is not hard to work out. They want to make it a fairer fight between first time buyers and BTL landlords.
They want BTL landlords to be more professional and to offer higher quality accommodation. All that sounds good – but could there be a more ominous purpose?
The changes in buy to let in recent years point to clear policy changes by the government. This blog is in two parts:
- Part 1 looks at the recent changes along with some changes in the pipeline.
- Part 2 looks at what the changes may mean for the future of BTL.
PART 1 – RECENT AND PENDING CHANGES
1. Ending of mortgage interest relief for individual landlords
From 2017 to 2020 the government is cutting the mortgage interest relief available to individual landlords, but not corporate landlords.
The impact will differ according to the specific circumstances of landlords. However, broadly, landlords will face higher income tax bills each year and will see falling profits unless they can find some way to improve their position – for instance by increasing rents.
2. Stamp duty surcharge
IN APRIL 2016 THE GOVERNMENT INTRODUCED THE 3% STAMP DUTY SURCHARGE ON BUY TO LET PROPERTIES AND SECOND HOMES.
The effect for BTL investors is an increase in the costs of purchase and on this point puts a home buyer at an advantage when chasing the same property as an investor.
3. End of wear and tear allowance
The 10% wear and tear allowance for furnished lettings was abolished in April 2016. Landlords are no longer entitled to deduct 10% of their net rent from profits before calculating tax.
Landlords are now only entitled to claim tax relief when they actually purchase furniture for a property.
The effect of the change is to make a larger proportion of rent taxable, an increase of the tax bill.
4. More stringent mortgage stress tests
Since the 2007-8 credit crisis, lenders have been carrying out increasingly tougher affordability tests on BTL borrowers.
Since 2017, BTL borrowers generally have faced stress-tests based on notional borrowing at 5.5% – with lenders typically requiring rental cover of 145%, up from 125%.
The impact is not significant in parts of the country enjoying good rental return. However in expensive parts of the country, such as London and the South East, landlords are having to provide bigger deposits as loan to value lending has reduced.
THE OUTCOME IS HIGHER PURCHASE COSTS FOR LANDLORDS AND A LOWERING OF THE RETURN ON INVESTMENT (ROI) – A DOUBLE BLOW.
5. Harsher landscape for “portfolio landlords”
Since September 2017, landlords with 4 or more properties (“portfolio landlords”) have been subject to a special underwriting process making it more difficult, expensive and time consuming for them to secure mortgages.
Anecdotal evidence is that portfolio landlords are finding it more difficult to secure funding and harder to add to their portfolio or otherwise invest in their property.
In the long term it is reasonable to expect that their portfolios are likely to decrease not increase.
6. Right to rent
From 1st February 2016 landlords have had to check that their tenants have a “right to rent” property in the UK; basically, that they have a right to live in the UK.
Landlords need to check the originals of “acceptable documents.” Landlords must not discriminate; they must check everyone, not just people they think may not be British citizens.
Guidance can be found on the Government website www.gov.uk. Landlords can be fined for breaching this provision.
7. Rise of landlord licensing
Local authorities are increasingly bringing in landlord licensing schemes, requiring landlords to hold a licence to be able to rent out property. They are a great source of income, and more and more councils can be expected to impose licensing schemes.
For landlords, licensing is yet more red tape and an additional management expense. Not only is there the cost of the licence fee, there is also the cost of any works necessary before the licence can be granted.
Some landlords may not qualify for a licence and may have to dispose of properties.
Breach of licensing provisions can lead to a fine or even a ban.
SUPPORTERS OF LICENSING ARGUE THAT THEY WILL DRIVE OUT BAD LANDLORDS AND IMPROVE THE QUALITY OF RENTAL UNITS.
8. Energy Performance certificates
From 1st April 2018, landlords (residential and commercial) must not renew a tenancy or grant a new tenancy where the EPC rating is below E, unless there is an exemption.
From 1st April 2020, a residential landlord must not continue to let a building which has an EPC rating below E unless there is an exemption. In the case of commercial property, the compliance date is 1st April 2023.
Breach by a landlord can lead to a penalty of £5,000 to £150,000
9. Changes in the pipeline
There are important changes in the pipeline which may hit BTL landlords in the pocket.
PREMISES LICENSING. From 1st October 2018 the definition of a HMO will be widened to cover any property occupied by five or more people forming two or more households.
The new definition will bring in many two-storey student houses which previously were not affected.
The owners of affected properties will need to prove that they are “fit and proper” to hold a licence and the properties will need to meet strict minimum requirements aimed at improving overall standards and safety of lettings.
For landlords affected, these changes could involve financial outlay, perhaps significant outlay.
LETTING AGENT FEES. Probably in 2019, the government is expected to ban letting agent fees (payable by tenants when looking for a property to rent).
The changes will impact adversely on landlords if, as expected, they lead to agents charging landlords more for their services.
PART 2 – WHAT THE CHANGES MAY MEAN
The many changes seen in recent years reflect the growing political focus on the rental sector.
The political story
More and more people are renting and the main parties are making an obvious play for the tenant’s vote.
A lot of property investors were shocked and amazed in 2015 when Conservative Chancellor Osborne announced the planned cut back of mortgage interest relief. Of course if those investors had a rudimentary knowledge of politics, they would not have been surprised.
Having spent decades telling everybody they were the home-owner’s friend, the Conservatives took a look around, saw that tenant numbers were growing at the expense of home-owners and saw it was in their best interest to be “tenant friendly.”
There is no doubt the raft of changes in recent times are high-minded, well-intentioned and will improve the private rental sector and the housing conditions of tenants.
THEY SHOULD, IN THEORY AT LEAST, MAKE IT A LITTLE BIT EASIER FOR HARD-PRESSED FIRST TIME BUYERS TO GET ON THE HOUSING LADDER.
The outcome for BTL landlords is, however, far from benign. For them, the changes have caused:
- Higher taxation
- Increased regulation
- Higher risks of various kinds
- Higher purchase costs
- Higher running costs
- Lower returns
- Lower profits
- More difficult borrowing.
These negatives come against a backdrop of falling affordability – making it difficult if not impossible for landlords to profitably grow their portfolio in some parts of the country.
There are at present some signs that prices are flat or falling in London and parts of the South East – but even that is not a clear positive. Falling prices will help investors looking to buy, but it will worry owners who already have property and are seeing a reduction in the value of their assets.
Interest rates seem to be on the up. A fall in house prices coupled with a rise in interest rates could see large numbers of landlords being forced to sell up.
The overall position is not a good one for BTL landlords. There are oncoming threats from numerous angles.
Any landlord underestimating these threats does so at their peril.
The full effect of the cut-back on mortgage interest relief will occur by 2020. If that coincides with rising interest rates, falling house prices and even greater regulation, BTL landlords who have carried on like nothing has happened could face the perfect storm.
THINGS LANDLORDS CAN DO TO PROTECT THEIR POSITION
It is clear that BTL landlords, if they have not done so already, need to carry out a thorough and honest risk-assessment of their current position and take all possible steps to protect their future position.
Landlords should ensure that their financial management is tip-top with emphasis on:
- Bringing down running costs
- Maximising rents
- Reducing taxation.
If rental income is to be lost by the cut-back in mortgage interest relief, landlords need to find viable ways to increase their income. That could be rental income but it could also be non-rental income from property or other sources
Strategy-diversification is also something which may need to be considered. If the bulk of a landlord’s income derives from residential buy to let, they may be able to reduce their risk profile by shifting to other strategies such as commercial property or serviced accommodation lettings.
Finally, it is necessary to respond to the warning often heard in many business these days:
“Get large or get out!”
With clear indications that the government would prefer more professional landlords, and with the cost of professionalism increasing all the time, landlords need to decide if they have the inclination, time, resources or size of portfolio to stay in buy to let.
Prudent landlords will fully review and discuss their options with their professional advisers now – considering dispassionately the pros and cons of remaining a BTL landlord. This is not a time for sentiment. Bold decisions have to be made based on the hard financial facts.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com