Buy-to-let Changes Seen Fundamentally Altering The Property Sector

It’s all change in the UK’s multibillion-pound buy-to-let market as the government introduces sweeping new measures aimed at making taxation fairer and helping people who are struggling in the property market to buy a house.

Buy-to-let has become a sure-fire way for many people to earn cash while protecting their initial investment, and up to now, private landlords have been able to get interest relief on their mortgage by deducting the interest from the amount of money they receive in rental payments. That’s unfair to other taxpayers, said the government, which set about “levelling the playing field”, as one Treasury official put it, and declared in the summer budget that it would phase out the relief by 2020.

Announcing further changes in the autumn statement in November, Chancellor George Osborne said the government would slap a 3% surcharge on stamp duty on buy-to-let properties, and that it would also apply to people buying second homes. The measure is due to come into effect on 1st April 2016, and the Chancellor hopes the effect will be to deter some people from making a property investment just so they can rent it.

The government has been mindful of the growing number of young people who have been effectively “squeezed out” of the property market because investors who already own one or more properties swoop in on houses when they go on sale and snap them up to let them out. This has forced many people who have not been in the jobs market for long, and don’t have sufficient savings, to continue to rent flats or houses instead of buying them.

Sidestep?

The fear is, however, that buy-to-let landlords will avoid paying increased tax by simply increasing the rent their tenants pay. Many industry analysts have said since the autumn statement that that’s precisely what will happen, and if it does, it would effectively dash the government’s hopes of bringing about change in the buy-to-let sector and getting more young people into new homes of their own instead of renting.

For the renters of buy-to-let properties who may be saddled with higher rents that private landlords pass on to them to offset the higher tax charges, it may serve as a double blow: less money to save for a deposit for a home and still being locked out of the property market as landlords continue to buy up newly available properties.

‘Easy’ loans

There has also been rising concern about the ease with which buy-to-let landlords have been able to get their hands on the finance to buy their properties, with the Bank of England going as far as saying such widespread lending could pose a potential risk to the wider UK economy.

What’s particularly worrying the bank – or its Financial Policy Committee – is that traditionally, buy-to-let mortgages have been easier to get than if people were making an application for their own proposed home. The committee said it was paying close attention to the buy-to-let market and would take any corrective action as deemed necessary to protect the national economy.

Tightening belts

That has spurred some lenders, such as Barclays, to up their lending criteria before authorizing a mortgage for a buy-to-let property. Previously Barclays needed 125% rental income of the monthly rental interest but now the lender has raised it to 135% of the rental interest, based on a mortgage rate of 5.79%.

This relationship – between what the landlord gets in rental income and what their monthly mortgage repayments are – is one of the main lending criteria of banks and as buy-to-let lending tightens, some are projecting an unenviable situation where only borrowers with 50% deposits will qualify for a mortgage. That would surely spell an end to the current buy-to-let boom as growing numbers of landlords, or those hoping to become a landlord for the first time, would be turned down by financial intuitions.

Offsetting risks

Where does all this leave buy-to-let landlords? Furious, for sure. But it’s not all bad news either. Smaller property investors are more at risk with these new changes than large corporate property investors. That’s because buying up six or even more properties at once – comprising one purchase – means a lower level of stamp duty is applied, compared to buying just one property, where the full rate is effective.

Indeed, since Mr Osborne’s announced changes, there has been a dramatic increase in the number of landlords forming companies to make property purchases. Some lenders have reported a tripling of mortgage applications using a limited company in recent months, and as many as 5,000 mortgages were granted using this method from July to September this year.

Reducing overheads

Whatever ‘size’ landlord you are, we would recommend revising your business model this side of April and identify areas where you may be able to ‘trim the fat’ on excessive costs associating with finding tenants and managing rents.

Of course, the first cost that springs to mind is high letting agent fees.  A landlord with a property that commands a rental income of ￡1200 per month could be saving up to ￡1776.60 on their annual letting agent fees.  This is a comparison between 12% + vat per month which a typical agent would charge vs a flat fee of ￡39 inc vat per month that LettingaProperty.com levy on their Gold package – a rent collection service which includes: finding a tenant, drafting the legal paperwork, securing the deposit and providing rent guarantee insurance and legal expenses!  A number of landlords with rents in excess of ￡2,500 per month are saving just over ￡4k per year!

One thing is certain, with landlords across the country collectively taking in more than ￡5 billion a month in rent, this is one sector that will continue to perform incredibly well.