Lloyds Banking Group predicts strong future for buy to let
- Published: Thursday 10 October, 2019
- Updated: Tuesday 05 May, 2020
- By: Nicola Eaton
Phil Rickards, head of the buy-to-let arm of Lloyds Banking Group, BM Solutions, has struck a hugely positive note with his observations on the future of the buy to let industry.
In an article in the Telegraph, Rickards demonstrates the cyclical nature of the private rental sector, over its history.
What is described in the article is the long term flux between times of significantly lucrative periods of the industry, which have been tempered intermittently by government intervention.
Each intervention has been to stop the profitability of buy to let spiralling out of control.
Going back to the First and Second World Wars, Mr Rickards describes the various events that resulted in highs and lows for the industry.
Reasons to be cheerful
Looking to the future, Rickards discusses various pieces of data that combine to support his positive outlook for buy to let.
Fundamental to his argument for demand for rental property is the growing UK population, unaffordable house prices and a lack of new homes being built.
For landlords, mortgage rates are low and rents are high. With income and expenditure working favourably for investors makes clear his conclusion – the long term is bright for buy to let.
Super-rich favour renting in capital
London landlords may be encouraged to learn that the super-rich are favouring renting over buying in London, as an upshot of the uncertainty around Brexit.
Properties in demand are those with weekly rental figures in excess of £5,000, so this good news will affect a sub-set of London property investors.
St John’s Wood and Notting Hill are the area’s most in demand for their schools. Mayfair is also much sought-after due to the quality of the developments available.
The data demonstrating this uptick in tenant interest comes from Knight Frank.
Tenants from America are particularly well placed to secure high end properties, as a result of the weakening pound.
Volumes of properties in this niche is narrowing, which has resulted in rents increasing and yields over 4%.
Keep within the law when advertising lettings
In March this year, the Ministry of Housing, Communities and Local Government made clear their intention to tackle discrimination against housing benefits tenants in rental property adverts.
"Guidance for lettings professionals on consumer protection law" to address this issue.
The guidance is not just applicable to letting agents, it also applies to landlords and other property intermediaries.
What to do if buy to let mortgage terms do not allow housing benefit tenants
If a landlord has taken out a mortgage, where the lender stipulates they must not rent their property to tenants in receipt of benefits, it is relevant and necessary to stipulate this when advertising the property.
This is because the landlord is contractually bound to adhere to this rule, in order to adhere to the terms and conditions of their mortgage.
This is the case for any other contractual requirement with this stipulation.
The objective of a rental property advert is to provide all material information relevant to allow a prospective tenant to assess their options in an ‘informed and efficient’ way.
What to do if you are not contractually bound to refuse benefits tenants
Where landlords are not bound by any contract on the matter of renting to benefits tenants, a falsified claim that this is the case would be misleading.
Landlords should be mindful that presenting misleading information to consumers, breaches Consumer Protection Regulations.
Whether landlords self-manage and advertise their properties themselves, or use a letting agent, it is important to be clear on these rules.
Where landlords are uncertain as to the terms of their mortgage on this point, they should speak to their lender.
Intermediary-only lender offers landlords affordability loop-hole
Landlords are gradually getting to grips with the impact of more stringent underwriting standards, in the buy to let industry, but a new lender product may help some caught by the tighter affordability checks.
Back in 2017, the Prudential Regulation Authority tightened the rules around the underwriting of buy to let mortgages. Affordability checks became much tighter than before.
For many buy to let products, property investors must demonstrate that their rental income exceeds the mortgage repayment amount at a rate of 145% and remains affordable at a ‘stressed’ mortgage interest rate of 5.5%.
Historically, rental coverage was at the much lower rate of 125%.
As a result, some landlords have struggled to secure the loan size they require where they would not have done in the past.
One way around this is to take a longer terms fixed rate of 5-years or more, where the tighter affordability checks do not apply.
What is interesting about this lender’s product is that the affordability check is still undertaken at the more favourable calculation, but the investor can exit the product without being charged an early repayment charge (ERC) after just three years.
There are two products on offer, one at 65% loan to value with a maximum loan amount of £1 million and a second at 75% loan to value with a maximum loan amount of £750,000.
To secure these products, landlords must use an intermediary. Commercial Trust advisors are able to discuss these products.
On face value, this proposition offers an interesting and possibly favourable route for landlords struggling on affordability, who do not want to fix their rate for 5 years or more.
However, when assessing buy to let mortgage options it is important to compare the benefits on offer with other products in the marketplace. Associated costs and other factors may mean this deal does not represent the best outcome for an investor, based on their wider circumstances and requirements.
RLA slams government proposals for possession reform
The Residential Landlords Association (RLA) has declared new government proposals for repossession ‘dead on arrival’.
In April 2019, the government made public their plans to end the Section 21 eviction process – the ‘no fault’ eviction.
A consultation on the matter was launched. The resulting proposals face strong criticism from the RLA, who have said that they “will not work and threatens the supply of homes for rent”.
Critical to the reform of the eviction process, for landlords, is of course the time it takes and cost of evicting tenants who are genuinely causing serious problems.
Unpaid rent and anti-social behaviour, damage to a property and more present serious issues to landlords.
If a repossession is handled via the courts, landlords face an average of 22 weeks (nearly half a year) before the matter is resolved.
The RLA have said that the government proposals “fails to give any guarantee that landlords would be able to swiftly regain possession of a property where they have a legitimate reason.”
Where anti-social behaviour is the reason for seeking repossession, RLA states the proposals make it nigh on impossible for landlords to evict.
This is because proof of such behaviour would be required. The primary source of such proof is likely to be the neighbours who are the victim of it.
Where households are subject to antisocial behaviour from a neighbour, RLA puts the point that their willingness to give evidence of it, whilst having to remain living alongside the accused, is quite likely to meet with reluctance through fear of the consequences.
A further issue raised by the RLA, is that the proposals also do not adequately address ways in which the failure of a tenancy can be avoided.
In a specific example relating to unpaid rent, the RLA has highlighted that the government proposals do not seek to improve the handling of Universal Credit payments.
Policy Director at the RLA, David Smith was clear on the failure of the proposals, in his eyes:
“The system for repossessing properties should be fair to both tenants and landlords. The Government’s plans do not achieve this.
“The Ministry of Justice’s failure to properly engage with the process and provide clear and detailed proposals to improve the court system is especially disappointing.“
This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.