All Change for Buy to Let
To say that we are experiencing a period of change in the housing market feels like an understatement when you consider the intense transformation that buy-to-let has undergone in recent years – and especially so when you think of what is still yet to come.
Theresa May’s government is bringing with it new economic and social policies, and top priority remains negotiating the nature of the UK’s departure from the EU following last year’s landmark referendum. Despite these changes, landlord confidence is rebounding. More than half of landlords interviewed in the second quarter of 2016 thought Brexit would negatively impact their business. By Q3, this had already fallen to 46%. This resilience is being reflected in the wider industry as lenders and brokers look to get to grips with uncertainty.
A new approach to housing market policy?
The housing market has been a key focus of Theresa May’s new government, with a key emphasis on boosting overall supply. During his tenure as Housing Minister, Brandon Lewis pledged to build one million by 2020. However, reality has fallen short of ambition. The White Paper, issued in February, was a welcome recognition that more must be done, and the weight of conviction seems stronger than ever before. Speeding up the planning and building process will go a long way to boosting the supply of homes. However, this will not happen overnight, and even if we do see an unprecedented building boom, it is clear the private rented sector (PRS) will continue to play a vital role in meeting the needs of the UK’s growing population.
The government recognised the PRS’ importance in the White Paper, by highlighting its support for increased institutional investment to encourage Build to Rent. Support for private landlords witnessed an appetite for longer-term tenancies – a move that will be popular among tenants, lenders and landlords alike, reducing void periods per year.
What we do need to see is consistent support for the sustainable growth of the sector, coupled with measures to ensure it delivers high quality housing that meets the needs of its tenants. Developers need to be supported by appropriate capital initiatives that make lending for development more widely available, especially at a time when we expect to be entering a period of economic uncertainly.
April could prove a taxing month
Changes to mortgage tax relief for landlords will begin from April this year, restricting how much can be deducted from rental income for tax purposes. This will be phased in over the next four years. From April, the allowable deduction will be restricted to 75% of finance costs, with the remainder deductible at a basic rate. This 75% will taper down to 0% from 6th April 2020, meaning only a basic rate deduction will apply to finance costs from this point.
This change has already driven many landlords to re-assess and re-structure their property ownership and mortgage finance differently as they look to anticipate and mitigate the impact it will have on their margins. 11% of landlords had already moved their holdings for tax-efficiency by September last year, with a further 25% considering doing so5. One such method was a move to incorporating and accessing borrowing through a company structure. This is being supported by specialist lenders with the expertise and product sets to support more complicated forms of finance. As a result, lending to limited companies hit an estimated 100,000 loans in the first nine months of 2016 alone – twice that of the whole of 2015. As the tax changes come into force, and property investors begin to see the impact on their tax returns, we expect that the number of limited company loans will rise further.
At the same time, the market is coming to terms with changes to underwriting required by the PRA. Under the new standards, lenders must take a much broader view of affordability, including the impact of revised tax rules. However, importantly, they must apply a minimum interest rate stress test of at least 5.5% for the first five years of a mortgage. This ultimately means many investors looking to secure finance for new investments next year will need to provide larger initial deposits. From September, lenders will also need to carry out more stringent checks for portfolio landlords with four or more properties, with underwriting to account for the financial details of each of the landlord’s properties if the investor seeks to remortgage or raise new finance.
These tax and regulatory forces are increasing the role specialist lenders have to play by effectively placing them into the mainstream. While larger lenders cater to the needs of the many, they often lack the agility, or desire, to meets the needs of those with more complex needs. As an established specialist lender, our team’s expertise and experience enabled us to implement the recent changes to our affordability assessments for all new buy-to-let mortgage applications. By taking a forensic approach in response to the PRA changes we’ve ensured that our products meet not only regulatory requirements, but also the increasingly complex needs of landlords.
Forward planning is always important in preparing for the future, which is something that landlords have certainly embraced over the last year and specialist lenders and brokers are well positioned to help them navigate the challenges that await us.
Steve Seal of Kent Reliance
Tel: 029 2069 5446
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