Doug Hall tells landlords to stay confident as sweeping changes come into force this year.
Last years’ New Year article started with the statement, “well what a year it has been for the buy-to-let market”. I thought 2015 was filled with unprecedented change, but fast forward yet another 12 months and many landlords – still reeling from the whirlwind of 2016 – are now preparing for an even more challenging 2017.
In the last decade the market has grown exponentially Council of Mortgage Lenders figures show that the market has grown from 840,000 buy-to-let mortgages outstanding with a total balance of £93.2bn at the end of 2006, to 1.8m buy-to-let mortgages with an aggregate balance of £214bn by the end of 2015.
The first of a number of government moves considered as an attempt to curb enthusiasm for the buy-to-let market descended onto the market on April 1 this year, when properties bought as second homes or buy-to-let incurred an extra 3% Stamp Duty Land Tax. This extra cost – although unwelcome – was in many ways the calm before the storm.
We are starting to see things settle in the aftermath of the changes which caused a stampede in the first quarter of this year, but there’s no doubt that it has impacted purchases as mortgage lenders are now seeing the market move to a 70/30 split in favour of remortgages.
The next hurdle came by way of the Mortgage Credit Directive. I remember discussing it with many lenders in the advent of its introduction given the implications of time, effort and investment necessary to help implement the new rules.
It caused a lot of debate, especially around how lenders – after spending time and resource to accommodate the new regulation – then had to be able to interpret the new landscape. Despite these challenges for the industry, loans in the the new category of Consumer Buy to Let (formerly Let to Buy and Inherited Properties) are now being written by the majority of the key lenders.
As a result, aligning their systems to the evolving shape of the market has afforded them for innovation.
Next, we flashback to last year’s Budget, when we first heard of government plans to change the way in which tax relief on finance costs will be treated for landlords on a sliding scale from April 2017. There has been much debate in the build-up as some lenders have taken time to consider options while others have moved to increase their Interest Coverage Ratio (ICR) from the standard 125% to 140% and above to cater for the increased tax liability impacting higher and top tier tax payers.
One of the larger lenders has recently announced it will take a different approach to help borrowers be best placed for the impending changes. BM Solutions – part of Lloyds Banking Group – has recently explained its plans, which are calculator-based and designed to reflect an individual’s tax position rather than apply a one-size-fits-all solution. I anticipate this will be very well-received by intermediaries and landlords alike, and particularly by basic rate tax payers who may otherwise be forced into a much higher ICR.
It will be well into 2017 before we can gauge a true impression of the impact, but potential and existing landlords who fall into the higher tax bands should definitely be having conversations about specialist tax advice would definitely be recommended for both new and existing landlords.
Last year, concern by the Financial Policy Committee (FPC) that the growing buy-to-let market could potentially destabilise the housing market has now led to new FPC powers of direction granted over buy-to-let lending. As a result we have spent 2016 watching intently for further moves to ‘control’ buy-to-let lending activity.
Then came autumn’s Prudential Regulation Authority (PRA) consultation from left field which has sent further mandatory change rippling through the market as lenders forced to adapt again – particularly in terms of the stress rates applied to buy-to-let lending moving to 5.5%. The ability to use a different stress rate for five-year fixed may be a positive step for the market, yet it would be unwise to think the regulator is not watching closely in the wings.
We can expect 2017 to signal a new shape for the market with the impact of the changes being monitored by all. Adapting to these new regulations and processes, including longer term underwriting standards – another change in 2017 affecting landlords with four or more properties – is going to prove another challenge for lenders. I do have it on good authority that some lenders are already working on this, so I’m hopeful that there we will see some positive solutions.
Landlords are expecting this raft changes to impact profitability, but those largely impacted may look to mitigate this by restructuring their portfolios such as transferring ownership to limited companies. This is not appropriate for everyone, and again seeking independent tax advice is fundamental for landlords to get the best outcome.
Despite what has seemed like a steeplechase of change over the past 12 months, the market remains resilient and continues to play a key role in addressing the UK’s housing shortage. According to a recent BM Solutions survey in conjunction with BDRC Continental, landlord confidence has bounced back strongly and is almost back to pre-2015 Budget levels.
Landlords remain confident about the future prospects of their own letting business with many increasing rents as tenant demand overall remains healthy. This confidence is buoyed by rental income and profitability remaining strong, with a quarter of landlords now looking to increase their portfolios amid the current low interest rates.
The Private Rental Sector will continue to provide valuable options and flexibility within the housing market, and we have to hope that we’ll be given a curve ball holiday.
The market indeed needs us all to remain committed, calm and confident, and quality of advice will remain a key strength and differentiator for advisers, backed by robust products and the support of providers to ensure everyone on board is best placed to navigate the new landscape ahead.
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