Impact of 2020 Budget on landlords

Impact of 2020 Budget on landlords. Base rate drops to 0.25% - how will this affect mortgages? 13% of people pay rent or mortgage with their overdraft. Wales caps interest on rent defaults. The Midlands is set to drive buy to let purchases in 2020;
Parliament

Newly appointed Chancellor of the Exchequer, Rishi Sunak, has delivered the 2020 Budget, amidst significant economic uncertainty caused by the Coronavirus.

Given this landscape, the focus of the Budget was split between the Chancellors plans to manage the impact of the Coronavirus and delivery of Conservative manifesto plans.

What is the impact on landlords?

No news was good news for UK landlords in this budget. Plans for housing focused on the need for more affordable and safe housing.

Limited company investors should note that Corporation Tax has not been reduced to 17%, as had been planned, but will remain at 19%.

Foreign investors in UK property will be subject to a 2% stamp duty surcharge. The impact of this is likely to be modest.

Foreign investors are drawn to property in the UK because of the stability the UK offers and the strength of the English legal system. A 2% surcharge should only be a small proportion of otherwise healthy profit from their investment.

Coronavirus

Mr Sunak opened the Budget speech with an acknowledgement that the Coronavirus has the potential to affect one fifth of the working population and there could also be a reduction in consumer spending.

He has pledged 30 billion pounds’ worth of fiscal stimulus to support UK through Coronavirus, delivered via a three-point plan:

  1. To give the NHS whatever extra resources NHS it needs, to fight Coronavirus via £5bn emergency response fund
  2. To give financial support by those unable to work as a result of the Coronavirus.
    a. Statutory sick pay will be paid from day 1 not day 4 and will also available to all those advised to self-isolate, even if they have not got symptoms of the virus
    b. Sick notes will soon be available from the 111 telephone service.
    c. Self-employed people will be given quicker access to Employment Support Allowance, from day 1 rather than day 6.
    d. Half a million pounds will be available via a hardship fund to help vulnerable people.
  3. Support for businesses given they will bear cost of reduction in workforce.
    a. Companies with less than 250 employees will be refunded for statutory sick payments of up to 14 days.
    b. Tax payments will be able to be deferred.
    c. SME’s will be able to access a business interruption loan scheme
    d. Business rates are being abolished this financial year for retail, leisure and hospitability
    Housing

The Chancellor will extend the affordable homes programme multi-year settlement by £12bn. Interest rates on lending for social housing will also be cut by 1 percentage point.

£1.1bn of the housing infrastructure fund will be used to build 70,000 new homes in high demand areas. £650m will be given to help rough sleepers into permanent accommodation.

£400m will be devoted to building houses on brownfield sites. The Chancellor has also said reforms will be brought in to bring the planning system into the 21st century.

There will be a new stamp duty surcharge of 2% for non-UK residents, from April 2021. This will not apply to UK limited companies whose shareholders live abroad.

In light of the Grenfell disaster, there will be a new building safety fund of £1bn to remove all unsafe cladding, on private and social high rise buildings.

Aspects of the budget, outside Housing, are as follows.

Economic growth

The Chancellor reiterated that the spread of coronavirus was significant but temporary. He acknowledged that, prior to the outbreak, the UK was facing a slowing world and political economy.

To counter this, Mr Sunak resolved to be ‘brave and bold’ by injecting £175 billion for ‘future prosperity’.

The Office for Budget Responsibility (OBR) had forecast GDP (without the impact of Coronavirus) to be 1.1% in 2020, 1.8% in 2021, then 1.5% 1.3%, 1.4% in following years.

Furthermore, and quoting the OBR, Mr Sunak said “Today’s large-planned increase in public investment could boost potential output too. If future governments have the same determination to continue our approach the UK’s long term productivity will increase by 2.5%.”

Inflation

The OBR had forecast 1.4% in 2020, 1.8% in 2021 and then an amount broadly in line with target for the rest of the forecast period.

Fiscal forecast

The Chancellor announced that public finances are strong, with the deficit down from 10% in 2010 to less than 2% in 2019. Required changes will be reported in the autumn.

Borrowing

Borrowing is forecast to increase from 2.4 in 2021 to 2.8 in 2021/22 and then fall by one percentage point each year for the next three years.

The Chancellor made clear that whilst the response to the Coronavirus is significant and (having happened so recently) isn’t reflected in the forecasts, he has time to adjust fiscal policy to counteract this.

Tax

It was announced that the National Insurance threshold is increasing from £8632 to £9500.

There will be no VAT on sanitary products.

Mr Sunak has also said that he is keen to tackle aggressive tax avoidance, evasion and non-compliance and as such is giving HMRC extra funding to secure £4.4bn in additional revenue. The details of how they will do this are yet to be announced.

Duties

There will be no increase in duty on any alcohol or fuel.

Support for business

Within the private sector £130m funding is being given to extend start up loans.

The Chancellor is also giving £200m to the British Business Bank to invest in scale-ups, £200m will be given to life sciences and the government will invest more money for growth hubs.

£5 billion will new export loans for businesses.

Business taxes

The entrepreneur relief lifetime limit is being reduced from £10m to £1m.

The structures and buildings allowance is being increased from 2% to 3%, which equates to £100,000 relief if investing in a building worth £10m pounds.

Corporation tax will not be cut from 19%, contrary to prior plans which had suggested it would drop to 17%.

Technology

The government has pledged to invest in ideas, and will increase investment in R&D to £22m per year, which is 2.4% of GDP.

Funding will grow next year by 15%. 1.4bn will be invested in the Science institute in Weybridge – which is currently investigating the Coronavirus.

£900m will be devoted to nuclear fusion, space and electric vehicles. The government also plans to invest at least £800m in a blue skies funding agency in UK modelled on ARPA (Advanced Research Projects Agency) in US.

£400m will be given to universities around the UK.

Environment

Tax on pollution will be increased. From April 2022, the government will re-balance rates on energy by freezing the electricity levy and raising the levy on gas.

The climate change agreement scheme will also be extended by two more years to help businesses transition to net zero.

From April 2022 £200 per ton will be charged to manufacturers and importers on packaging made from less than 30% recycled plastic, the objective is to increase use of recycled plastic by 40%.

Tax relief on red diesel (used by off-road vehicles) will be largely abolished, with the exception of the agricultural, rail, domestic heating and fishing industries.

£1bn will be invested in green transport solutions.

£120m will be given to repair flood damages and defences. £200m will be give direct to local communities. Investment in flood defences will be doubled over next 6 years to £5.2bn.

The Chancellor has pledged to ‘protect, restore and expand’ natural habitats through a £640m ‘nature for climate change’ fund. There are plans to plant 30,000 hectares of trees.

£800m is to be invested in carbon capture storage clusters creating jobs in Teeside, Humberside, Merseyside and St Fergus in Scotland.

Infrastructure

Over the next 5 years the Chancellor intends to spend £600 billion on roads, rail, broadband and housing.

There is an intention to move civil servants outside central London and for the Treasury to open offices in Wales and Scotland. A civil service hub will be set up in the North of England.

An additional £640m will be given to the Scottish government, £360m to the Welsh government and £210m to the Northern Ireland Executive

The NHS

£10m will be donated to the Armed Forces Covenant Fund to support mental health services for veterans. There will also be a new National insurance relief for employers of veterans.

£34bn is being invested in the NHS over the next 5 years. £6bn of new funding will supplement that to fund 50,000 more nurses, 50m more GP appointments and 40 new hospitals.

Bank of EnglandBase rate slashed to 0.25%

In an emergency measure to help stabilise the UK economy, amidst the effects of the Coronavirus, the Bank of England has temporarily dropped the base rate (BBR) from 0.75% to 0.25%.

The Monetary Policy Committee (MPC) held a special meeting on Tuesday 10th March, at which the decision to cut the rate was made, a result of the “economic shock” of the Coronavirus.

The cutting of the base rate seeks to achieve the following:

  • Support business and consumer confidence
  • Bolster cash flows of businesses and households
  • Reduce costs to businesses and households
  • Improve the availability of finance

How is my mortgage affected?

Fixed rate mortgages, by definition, are not affected. Fixed mortgage rates do not change during the initial rate or ‘deal’ period.

This means monthly mortgage payments will remain the same over that time – irrespective of any fluctuation in the mortgage market or the economy.

Tracker rate mortgages will be affected if they track the Bank of England base rate. Some track the LIBOR (London Inter-Bank Offered Rate), others are ‘managed rates’ which are set by the lender and may or may not change according the influence of base rate fluctuations.

A reversion rates is the rate a lender applies to a mortgage after the initial rate period, if you do not take out an alternative product. Like managed mortgage rates, reversion rates are controlled by the lender.

Will buy to let lenders cut their rates?

Cutting mortgage rates means reducing the income, from mortgage interest, to a lender.

Lenders will be watching to see if the drop in the base rate is a temporary change in response to the coronavirus, or a longer term adjustment.

If the MPC elects to retain this lower base rate for the long term, lenders may opt to reduce their rates.

If the lowering of the base rate is only temporary, lenders would be less likely to make a change to their rates.

Jorden Abbs, director of sales at Commercial Trust commented on the news:

“The base rate has been reduced to stimulate the economy whilst short-term coronavirus fears take a grip.

“Over the last 3 years, the majority of our clients have taken out fixed rates.

“Fixed rates are not directly linked to short term movements in the base rate. They reflect a more long-term view about where rates will be.

“Is there a possibility that lenders will reduce their rates? Some lenders have already done so. Some lenders are already very competitively priced. Some lenders have very little room for movement on rates. In the main, I expect most lenders to wait and see.

“So, in short, property is a long term investment and currently rates are at historically very low levels. Short term gyrations in the base rate have little impact on the long term picture for our clients.”

Couple looking at paperwork13% of people pay rent or mortgage with overdraft

Recent research by Comparethemarket.com, has highlighted that 30% of people use their overdraft to make ends meet, as cash runs out before the end of the month.

For landlords, a significant statistic within the research, showed that 13% are using their overdraft to pay their rent or mortgage. That equates to 1.2 million people.

Of that number, 20% of people are using their overdraft to cover the full cost. Around a quarter (24%) are paying approximately half of their rent or mortgage.

In January 2020, the Homelet Rental Index reported a 2.3% month on month increase in UK rents, with the average being £953 per month (including Greater London) or £793 (excluding Greater London).

The costs associated with overdraft debt, vary from lender to lender. However, from 6th April 2020, fixed daily or monthly charges will stop, in favour of an annual interest rate.

This has been brought in by the Financial Conduct Authority, with the objective of making overdrafts easier to manage and easier to compare lender-to-lender.

A number of lenders have, as a result, imposed a flat 39.9% fee on their overdraft facilities.

With these sums in mind, using an overdraft to pay even half of the amount, can prove very costly.

The increase in rents experienced in January, is a trend expected to continue throughout the year. 84% of ARLA Propertymark letting agents predict rent rises.

How does this affect landlords?

The data from Comparethemarket.com certainly reiterates the importance of ensuring rent is affordable for prospective tenants.

To help establish whether this is the case, landlords can:

  • Ask for recent payslips/bank statements – bear in mind that payslips only give half the picture. The tenant may have lots of outgoings, that do not leave them with enough of their salary left to pay the rent, bank statements in comparison may be more useful.
  • Ask for an employer reference – to demonstrate the tenant is in work.
  • Ask for a recent credit report – a credit report will indicate if a prospective tenant is in financial difficulty. The alternative is to run a credit check, but remember, written consent must be sought from the individual in question before securing a credit report.

Landlords with concerns may wish to secure a guarantor from the tenant, who would pay the rent on their behalf, if it became unaffordable.

Graphs and percentagesWales caps interest on rent defaults

Coming into force on 28th April 2020 is new legislation, which places limits on the amount that can be charged to contract-holders (tenants) by landlords and letting agents.

The legislation is the “Renting Homes (Fees etc.) (Prescribed Limits of Default Payments) (Wales) Regulations 2020”.

It limits when, and the amount, landlords and letting agents can charge when a contract holder misses a rent payment.

The first measure puts a grace period of seven days in place, before any charge can be made. So, interest on missed rent can only be charged once seven days after the due-date of payment has passed.

Interest capped at 3% above BoE base rate

If rent remains unpaid, after the seven-day grace period, interest can be charged at 3% above the Bank of England Base Rate.

The rule for charging interest is as follows:

“In the case of a failure to make a payment of rent after the end of the period of seven days beginning with the due date, the prescribed limit is the aggregate of the amounts found by applying, in relation to each day after the due date for which the rent remains unpaid, an annual percentage rate of three per cent above the Bank of England base rate to the amount of rent that remains unpaid at the end of that day.”

Legal language can be difficult to interpret and calculating annualised percentage rates of charge tricky. So, Commercial Trust recommends seeking professional advice on the matter, to ensure the legislation is followed correctly.

Costs for keys and security devices

There is an important distinction to be made, when it comes to charging contract-holders for keys, locks or similar security devices.

These costs can only be charged where there has been a breach of contract by the contract-holder.

The legislation allows for costs to be charged, where a breach has occurred, in circumstances where a lock required to give access to the contract-holder’s rental property has to be “changed, added to or removed”.

In the same scenario (a breach of contract), costs can be charged when a key “or other security device” is required to gain access to the rental property of the contract–holder.

What are the imposed limits for costs of keys and security devices?

The limit imposed is for the actual cost of replacement, change, addition or removal of keys or security devices which must be proven with a receipt or invoice.

If work associated with any of the above is undertaken by a third party contractor, that cost can be passed on, at cost price, to the contract-holder. This again should be evidenced by a receipt or an invoice.

For sale sign on terraced houseBuy to let purchases driven by the Midlands

Data from specialist lender, Paragon, shows that landlords in the East and West Midlands are leading the way, when it comes to buy to let property purchases in the coming 12 months.

Paragon’s survey is undertaken on a quarterly basis, with feedback from around 800 landlords.

24% of landlords in the East Midlands and 22% in the West Midlands plan to purchase rental property in the coming year.

The propensity to purchase extends further up the country. 19% of landlords in Yorkshire and the Humber and the North East anticipate buying more property in 2020.

Landlords planning to increase portfolio in next 12 months

Source: Paragon Bank PLC

By contrast, investors in central London and the South West are least likely to add to their portfolios.

On average, 14% of landlords are looking to buy more property, with three properties being the average number planned to be bought.

Purchases by property type

When it comes to the type of property those in the buying market are looking at, 52% favour terraced houses, 32% are interested in semi-detached property and 26% will be looking to buy flats.

Interest in the potentially greater yields of HMO’s (Houses of Multiple Occupation) is also reflected in the Paragon data. A quarter of landlords are planning to buy an HMO property this year.

Which landlords are looking to invest?

The larger portfolio landlords are those most likely to invest this year. Landlords with just one buy to let property, are least likely to purchase.

Number of properties owned by landlord

% of landlords intending to buy

1

8%

2-3

12%

4-5

15%

6-10

14%

11-19

14%

20+

20%

Source: Paragon Bank PLC

Source of funding

63% of landlords intend to buy property using a buy to let mortgage. Rates remain exceptionally low in the buy to let mortgage industry. Using mortgage finance can enable the purchase of multiple properties, by splitting capital into two or more deposits, rather than buying a property outright.

18% of landlords surveyed by Paragon intend to buy further property in cash. This is not an optional available to everyone, but can eliminate some of the costs associated with buying property.

17% of landlords looking to buy property intend to do so by releasing equity from existing portfolio properties.

Remortgaging to raise capital is a common practice to fund additional property investments.

By analysing a portfolio, a broker can identify the potential for raising capital from one or more properties, weighing up the rates available by property type and by calculating overall costs.

Some landlords favour portfolio mortgages, one product across all properties, to reduce the effort involved in administering their finances. This may not be the most cost effective option, but a professional mortgage advisor will make this clear.

Managing director of mortgages at Paragon, Richard Rowntree, made the following observations on the data:

"The proportion of landlords looking to purchase new property has been largely consistent over the past two years, but we are seeing regional variations and also a greater propensity for portfolio landlords to invest in property.

"Portfolio landlords have adopted a number of strategies to adapt to the tax and regulatory changes of recent years and we're seeing trends such as these landlords buying stock from smaller-scale participants as they exit the market, or targeting higher yielding properties, such as HMOs"

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