For Buy To Let landlords it has been an extraordinary time. Amongst a litany of regulatory changes, tax changes and general landlord bashing there has been a judicial win for landlords who campaigned against unfair mortgage rate rises and a realisation that actually, the market in general is in a pretty fit state.
There have been contrasting reports around rents staying strong and strengthening or weakening dependent on what report you read, but many landlords are eyeing the current environment as a pretty interesting buying opportunity.
Whilst the divide between the professional and amateur / occasional landlords seems to have got wider, certainly where activity is concerned, there does still seems to be a general misunderstanding of what exactly has been happening over the past few months.
To help, here is a whistle stop tour of what has been going on.
A few months back George Osborne, (remember him? Bloke who used to be Chancellor and thought he would be the next PM), embarked on an almost personal crusade against the Buy To Let market as a way of trying to stop an overheating property market as well as win a few easy votes.
Backed by many including the Bank of England they saw a systemic risk in the fact that Buy To Let landlords not only allegedly took away properties from first time buyers, but also posed a threat to stability if all landlords suddenly flooded the market with properties to sell at once.
So he introduced the following changes:
- Landlords of furnished lets can currently claim a wear and tear allowance of 10% of their rental income. With effect from April 2016 this relief was restricted to expenditure actually incurred.
- Mortgage interest costs can currently be deducted against rental profits which effectively gives the landlord tax relief at their highest marginal rate of tax. From April 2017 this relief will be reduced over 4 years to the basic rate of income tax (which is currently 20%).
- From April 2016 SDLT will increase by 3% for landlords (and second home buyers)
- From 2019 Capital Gains Tax arising on the sale of a property (other than the main residence) will have to be paid within 30 days of completion. At the present time the Capital Gains Tax is paid between (approximately) 10 and 22 months after completion.
On top of all this the Prudential Regulation Authority weighed in and called for a review on how lenders look at Buy to Let lending. This included recommendations such as:-
- Ensuring all lenders check landlords’ incomes properly
- Stress testing should take in to account a 2% rise in interest rates over the first 5 years of the loan, but with a minimum interest rate of at least 5.5%
- When assessing the minimum Rental Cover threshold, consideration should be given to the following costs where the borrower is responsible for payment: management and letting fees, council tax, service charge, insurance, repairs, voids, utilities, gas and electrical certificates, licence fee, ground rent and any other costs associated with renting out the property
- For portfolio landlords, defined as those with more than 4 properties, lenders will be expected to assess the borrower’s experience in the market including their full portfolio of properties and any outstanding mortgages, the assets and liabilities of the borrower and the merits of any new lending in the context of the investor’s existing portfolio
So, whilst it seems like a minefield going forward, the fact is that much of this is common sense and need not affect professional landlords unduly as long as they take the right advice and know their market.
It is also worth mentioning that this was all very much George Osbornes’ baby and we now have a new Chancellor who may well decide to reign back from some of the proposed changes.
Due to the above, most lenders have already been moving their Buy To Let mortgage rental calculations to cope with this.
Most lenders calculated the amount that can be borrowed based on the annual rental income having to at least equal the mortgage interest payments by 125% at an assumed 5% rate. Now many have moved to 145% at an assumed rate of 5% or even 5.5%.
In essence this means that landlords can now borrow less against each property, especially where yields are low.
The exception to this rule is where the product is fixed for at least 5 years, then some lenders will still work on the payrate of the fix which is much lower.
Another aspect of the proposed tax changes is that this has given rise to a growth in the number of landlords now looking to purchase in a company name rather than their own personal names. Whilst it does not get around the additional 3% stamp duty there are other benefits, although it is important to obtain proper tax advice before proceeding in either direction.
Lenders themselves have seen this as a growth area and more and more are coming in to provide products for those purchasing in a corporate entity, with some lenders even making their Ltd Company rates available at the same rate as their rates for those buying in personal names.
This is all good news and means that there is now more choice available for landlords looking to purchase in this way.
The good news of course is that interest rates available of Buy To Let products have never been so low. I mean, really low. You can now get a 2 year fixed at just 1.64%, (5.10% APR) or a 5-year fix at 2.69%, (5.02% APRC). For those who want to keep their options open, there is a variable rate at just 2.09% (2.15% APRC) with no Early Repayment Charges which is pretty remarkable.
With the current environment seemingly set to stay at low levels for a while, it seems that mortgage wise at least, it’s a good time for landlords to get finance.
For those with existing properties who see the current conditions as a buying opportunity, and there are many that do, now is an excellent time to look at restructuring your portfolio and release equity at these low rates before all the new changes come in to play.
Releasing equity now will enable you to have the cash to move quickly when looking at building up your portfolio.
In summary, whilst we have seen so many changes introduced and threatened, the Buy To Let market itself is going nowhere. If anything, it is maturing further and for those with the conviction and professional advice behind them, the future looks exceedingly bright.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
Your property may be repossessed if you do not keep up repayments on your mortgage.
A fee of up to 1% of the mortgage amount may be charged depending on individual circumstances.
A typical fee is £495.