What does 2018 have in store for buy-to-let landlords?

Expert view: Andrew Turner, chief executive, Commercial Trust

Mortgage Club awards winner 2018

2017 was a year of upheaval for buy to let landlords, despite the challenges and financial impact of various legislative changes, buy-to-let continued to deliver competitive returns.

So what does 2018 have in store?

Andrew Turner, chief executive at Commercial Trust Limited, looks ahead at what is in store.

Bedding in the PRA rules for portfolio landlords

In 2017, there were two rounds of changes brought in for lenders regulated by the Prudential Regulation Authority (PRA).

In January came the first phase, when buy to let mortgage affordability rules were tightened to protect borrowers and banks, in the event of detrimental financial changes.

Phase two was much later in the year, in September, when portfolio landlords (those owning four or more properties) became subject to more rigorous underwriting measures.

Now a landlord’s entire portfolio is subject to review by PRA lenders. Consequently, where landlords have poorly performing rental properties amongst those they own, this could have an impact on securing future funds.

I am a portfolio landlord, what do I need to do?

Assist a time-efficient application by having the following, up to date, information to hand:

  • A schedule of all the properties in your portfolio (including outstanding mortgages and cash flows)
  • Your business plan
  • Records of your assets and liabilities (including tax liabilities)

Speaking to a specialist broker firm can help to identify not only suitable products available on the market but also additional information that specific lenders might require.

Mortgage affordability and “Top-slicing”

A growing initiative, post-PRA changes, is the increasing number of lenders using a dynamic called ‘top-slicing’ to assess the affordability of new lending.

‘Top-slicing’ may be helpful where, as a borrower, you have a generous disposable income but the yield from your property is currently not adequate to allow the borrowing you require under the new affordability calculations. Some lenders will not only take into account your rental income, but also any demonstrable regular surplus income you have, from employed or retirement income, for example, to fulfil the affordability criteria.

I’ve been turned down for a BTL mortgage on affordability, what can I do?

There are a large number of lenders in the buy to let marketplace, all with different criteria and offering a variety of solutions to landlord borrowers.

It may be that one lender has turned you down, where another will happily help. Even if you have used an intermediary, with the scale of lenders available, an opportunity may have been missed. Speaking to a specialist can help ensure all stones are turned to find a workable solution.

Letting agent fees ban

At the time of writing, the Government has just released details of its draft bill on the letting agent fees ban.

The aim of the bill is to ban letting agents from charging tenants fees, and forms part of the draft Tenant Fees Bill, which the government hopes will ‘help millions of renters by bringing an end to costly up-front payments’.

The proposed ban is also designed to improve transparency and will prevent agents ‘double-charging’ landlords and tenants for the same services, whilst also putting a limit of six weeks’ rent on security deposits and one week’s rent on holding deposits.

The draft bill also seeks to establish clear rules on how and when holding deposits should be returned to tenants.

What do I need to do about the letting agent fee ban?

At present, nothing. Similarly, if you don’t currently use, or do not propose to use a letting agent to manage your rentals, it is a non-issue. However, if you do use a letting agent or are planning to, it may pay to monitor industry reaction so you can factor any cost changes into your investment planning.

Lost earnings to any business have to be replaced, either by other income or cutting costs to maintain profitability. There are a couple of possible outcomes when this bill is passed.

Agents may raise their charges to landlords, or reduce the work they do when managing rentals.

If you are affected, you have options, to self-manage your properties, to absorb any extra cost, or pass it on in rental charges, for example. Until the position is clear, it is difficult to decide on a course of action, the best you can do is keep informed.

Longer tenancy agreements

The Government has also announced plans to encourage more landlords to offer 12-month tenancies to tenants who want them.
At the time of writing, political debate is underway to determine how best to incentivise landlords to agree to longer tenancies.

On the one hand, longer tenancies may offer greater security for both parties, but they also carry a degree of risk. If either party is unhappy being tied to a tenancy, then a longer contract is not going to be a welcome prospect.

Points to consider when offering longer tenancies

Tying in to a longer-term contract with a new tenant can make things difficult if there are problems, getting to know your tenant first may give you the confidence to offer a longer tenancy. This cuts both ways.

Offering a longer term tenancy where you have a positive relationship with the tenant offers a greater sense of assurance that your property will not sit empty.

Your mortgage lender may stipulate a maximum tenancy length, so check this before making a change.

Why do lenders care? If your financial situation changes (e.g. mortgage rates go up) and the rent does not cover your monthly repayment, but you are contractually unable to change the rent, this may result in difficulty repaying the mortgage.

Furthermore, if things became so bad that a lender had to repossess the property, they would not be able to recoup their losses by selling the property straight away, if there was a tenant in occupancy tied into a long-term tenancy.

Universal credit reforms

The Autumn Budget delivered some good news for landlords with revisions to the Universal Credit system.

Where previously there had been plans to pay all Universal Credit direct to the claimant, a U-turn was made after concerns were raised by both landlords and tenants alike. Going forward, where tenants prefer their rent to be paid direct to their landlord, this will still be possible, hopefully reducing the risk of rent arrears.

Claimants will also be eligible for Universal Credit from the day they apply, rather than after seven days, while housing benefit will continue to be paid for two weeks after a claim.

The changes will take effect in the New Year, with the reduction of the seven-day waiting period set to commence in February, while the two-week housing benefit extension will begin in April.

Tenant credit history

The Credit Worthiness Bill is currently going through Parliament, which, if approved (as appears likely at the time of writing, with support from all sides of the political spectrum), will add a tenant’s rental payment history to their credit rating.

This initiative will more accurately reflect a tenant’s ability to make rental payments and as such, will also provide landlords with an extra layer of reassurance.

Minimum energy standards

Landlords looking to let properties with new tenants have until April 2018 to bring their property in line with new Minimum Energy Efficiency Standards (unless an exemption applies).

From that date, landlords will not be able to let a property or renew an existing tenancy, unless the property has attained a minimum Energy Performance Certificate (EPC) rating of E.

Landlords that fail to meet the new rules after 1st April, could be subject to considerable fines.

Upgraded Carbon Monoxide rules

In November, the All-Party Parliamentary Carbon Monoxide Group (APPCOG) campaign titled Carbon monoxide alarms: Tenants safe and secure in their homes set out its plans to enhance the current regulations for rented properties, making it mandatory for each home to include a fitted carbon monoxide alarm.

Alok Sharma MP, Minister of State for Housing and Planning, has backed proposals for landlords to fit a CO alarm in any rental property that contains a fuel burning appliance.

Scotland already has legislation in place, making it compulsory for all landlords to fit CO alarms. 2018 could see England and Wales follow suit.

More Bank of England base rate rises?

In November 2017, the Bank of England’s Monetary Policy Committee (MPC) increased the base rate by 0.25%, to 0.50% - the first rise in a decade.

The increase in the rate of inflation (which reached a high of 3% in September) was a big contributory factor to the rise in base rate, with the MPC suggesting inflation could continue to rise during 2018.

Not long after the rates rise, Ben Broadbent, deputy Governor of the Bank of England intimated that policymakers are as close as they can get to promising more hikes.

We’ve said, given all the things we assume in our forecast, many of which will be misses - there are always unknown things and unpredictable things happening - but given our outlook currently, we anticipate we will need maybe a couple more rate rises, to get inflation back on track, while at the same time supporting the economy, he told the BBC’s Today programme.

How would further BoE base rate rise affect landlords?

An increase in the base rate is a contributory factor in increases to mortgage interest rates. 

Locking into a fixed rate mortgage may guard against any concern you have that this could happen, but do bear in mind that if the opposite were the case you may lose out financially.

Change in Scotland

Whilst letting agents south of the Border are set for change, those in Scotland will also face new rules when on 31st January 2018, the Letting Agent Code of Practice comes into effect, aimed at raising standards.

Under the new rules, letting agencies must join a Register of Letting Agents, having submitted an application to join the code of practice by no later than 30th September 2018.

Anyone carrying out letting agency work after that date, without being registered, will be committing a criminal offence and could be fined up to £50,000 and face a six-month prison sentence.

However, entering the New Year, Scottish landlords are already adjusting to enormous changes in the Scottish private rental sector, which were introduced in early December.

The big change is the introduction of a new Private Residential Tenancy, which will cover all new tenancy agreements and will have no end date. The new rules mean that the agreement can only be terminated if a tenant provides written notice to their landlords. The landlord may also end the agreement by issuing one of 18 grounds for eviction.

The new rules cover a range of issues including notice periods for eviction, rental increases, an improved repossession process for landlords and the establishment of a new tribunal to hear landlord-tenant disputes.

Doing the maths to become ever more crucial

With tax changes continuing to bite, 2018 will put an even greater onus on landlords to do their maths and plan accordingly to ensure their businesses remain profitable.

Landlords were previously able to deduct their full mortgage interest costs from their income when calculating their tax bill. However, changes to mortgage interest relief are seeing this gradually reduce to 20% by 2020.

In the 2018/19 tax year, landlords will be able to claim 50% and in 2019/20 the figure drops again to 25%, until in 2020/21, when all financing costs incurred by a landlord will be given as a basic rate tax reduction.

The next set of tax return figures will start to give landlords a much clearer picture of the impact that these changes will have to their finances and will underline the importance of trying to plan ahead with their portfolios.

If you need help refinancing your buy to let properties, please do get in touch.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.