Buy-to-let news to Friday 15th September 2017.

London from the air

London’s outer boroughs offer potential

London’s outer boroughs could offer potential to buy-to-let landlords as graduates increasingly look to rent properties in cheaper areas of the capital.

With thousands of graduates starting their first jobs in London, but unable to afford to buy property, the rental market remains in high demand, but many are priced out of central areas which are traditionally more expensive, in order to find a cheaper place to rent.

For buy-to-let landlords, this is creating opportunity in areas just outside the capital that are less expensive to purchase and yet still offer attractive yields.

Bexley, with an average rent of £1,004 per calendar month, has seen the strongest average rental growth of all areas of London over the past year, at 1.98%, according to the latest Landbay Rental Index, powered by MIAC.

Other areas seeing growing demand include: Sutton, Havering, Croydon and Bromley, while more expensive boroughs to rent, such as Kensington & Chelsea, Westminster, Camden, City of London and Hammersmith & Fulham, have all experienced a fall in demand in both sale and rental markets.

The data revealed that graduates renting in London normally spend approximately half of their take home wages on rent, a figure that can rise to three quarter of monthly net pay, for those living alone.

Landlord potential

Andrew Turner, chief executive at Commercial Trust, said:

It can come as little surprise that many young people, particularly graduates starting their first jobs in the city with student debt and faced with the rising cost of living, are pushed out of central London by the high cost of property.

“London rents are typically amongst the highest in the country, which means those with lower incomes working in the capital have to look further afield to live.

“Graduates entering the job market will often not be able to afford to buy a home and will look to rent for a few years, whilst they save up the deposit for a first home, which is where decent rental property becomes invaluable and a prime opportunity for landlords.

Number of buy-to-let landlords falls, but portfolios grow

Man signing documentBuy-to-let landlord numbers have dwindled since 2015, as the effects of government changes to stamp duty and mortgage interest tax relief have hit the industry.

New research reveals that there are 154,000 fewer buy-to-let landlords than two years ago, although the number of rented homes in the UK has increased by 171,000 over the same timeframe, which means that portfolio sizes have grown to an average of 1.44 properties from 1.33 in 2015.

This means that whilst some landlords are choosing to leave the industry others, are instead growing their portfolios, illustrating just how adaptable some landlords can be to changing conditions but also highlighting that there is a mix of opinion on what the future holds.

In total, the number of UK homes available to rent rose from 4.9 million in 2015 to 5.1 million in 2017.

Data from Countrywide’s latest monthly letting index for August, showed that 73% of landlords own just one buy-to-let property now – back in 2010 the figure was 86%. Meanwhile, the number of portfolio landlords owning 10 or more properties has grown by 33% in the last ten years.

The data shows that the North East is the area where landlords own the most number of properties, with Yorkshire and the Humber next, followed by London.

Government crackdown no coincidence

Andrew Turner, chief executive at Commercial Trust, commented:

It is no coincidence that the number of buy-to-let landlords has fallen so sharply during the same period that the government has cracked down on the industry with a number of harsh changes.

“The government has introduced a 3% stamp duty surcharge on the purchase of second homes, which has added thousands of pounds of upfront costs for buy-to-let landlord purchases.

“At the same time, landlords have lost the 10% ‘wear and tear’ relief and mortgage tax relief is being phased out.

“All of these factors are hitting the pockets of landlords and resulting in smaller returns, which is off-putting for some.

“There will be further changes to absorb with the finalising of the next phase of Prudential Regulatory Authority changes at the end of this month. However, where some landlords have exited the industry, others continue to increase their portfolios and remain fully aware of the potential yields that can be obtained from renting out property.

Buy-to-let mortgage choice reaches 10-year high

Colourful house iconsNew data reveals more choice for buy-to-let investors than there has been for a decade, as the number of mortgage products available on the market increases.

The number of buy-to-let mortgages available has risen to its highest level for ten years, with the latest data from the Moneyfacts UK Mortgage Trends Treasury Report showing a 7% increase from August to September, as numbers soared from 1,613 products to 1,725.

That represents the highest number of buy-to-let products available on the market since December 2007, when there was a total of 1,942 products.

The number of buy-to-let mortgages has seen significant growth even over the past 12 months, in September 2016 the number of products available was 1,339.

Charlotte Nelson, finance expert at Moneyfacts, commented:

The BTL market has had an understandably bumpy ride of late, considering all the regulation and tax changes it has had to contend with. Despite this, the market seems to be buoyant, with the number of available products reaching its highest point since the 1,942 products that were recorded in December 2007, almost a decade ago.

"The market has clearly recovered from the tougher affordability rules that were put in place on 1 January, when it saw a dramatic drop in the number of products available to landlords. Since then, the number of deals on offer has gone from strength to strength, culminating in a rise of 7% this month, the highest month-on-month growth Moneyfacts has seen in 2017.

Andrew Turner, chief executive at Commercial Trust, stated:

These statistics highlight the competitiveness of the buy-to-let market at the moment.

“Certainly the government changes regarding stamp duty tax and the removal of mortgage interest tax relief have reduced the number of landlords and that in turn, has raised the stakes for many lenders, looking to attract business from a smaller pool of investors.

“The competition shows no signs of abating at present, with lenders unveiling lower rates or competitive products seemingly every week, although there is no guarantee that this will continue.

“For those committed to buy-to-let investment, this is a great time to take advantage of current low rates and the variety of products available.

“Of course finding the right product for your needs amongst this array of choice remains a challenge. Commercial Trust can help you to achieve your goals, taking into account your circumstances and the wide range of products on the market, simplifying the process and saving you time.”

Landlords urged to keep abreast of changing laws

Landlord reading newspaperBuy-to-let landlords have been urged to keep up to date with the growing number of rule changes to the private rental market.

The last couple of years have seen a number of new rules and regulations, which have had an impact on the finances of landlords.

The 3% stamp duty surcharge has reportedly led to a £2 billion boost to Treasury finances, while the phasing out of mortgage interest tax relief is starting to take effect and could potentially result in some landlords ending up in a higher tax bracket.

Additionally the government has scrapped the ‘wear and tear’ allowance, while from April 2018, landlords will need to ensure that their rental properties meet new Minimum Energy Efficiency Standards, if they are to be rented out again.

At the end of this month, the second phase of new Prudential Regulatory Authority rules must be in place with the lenders they regulate, which will impact on the way landlords with multiple properties are underwritten, while it will also become more expensive to lenders to lend on buy-to-let applications. Then of course there is the proposed letting agent fee ban, which could potentially see this loss in revenue passed on as additional costs to landlords.

All of these issues will have a profound financial effect on landlords, leading Direct Line for Business to call upon private landlords to keep up to speed with the new legislation so that they can plan their costs in advance, but also to avoid incurring fines for failure to adhere to new rules.

Christina Dimitrov, business manager at Direct Line for Business, commented:

“Being a landlord in the current climate can be a profitable business, especially if there is a demand for rental properties as we’ve seen in recent years. However, with so many changes taking place, and with more on the horizon it’s essential for any landlord to be fully up-to-speed with legislation, as the penalties for breaking the law can erode any potential profits.”

Andrew Turner, chief executive at Commercial Trust, stated:

As with any investment, it is important to make informed decisions.

“Buy-to-let – whether a full or part time occupation - is a business, which means accurate financial records and a sound investment strategy is essential. I urge every landlord to take this very seriously and to keep an eye on the changing marketplace, to allow for forward planning and adaptation, if and when it becomes necessary.

“The regulatory environment for buy-to-let investment in recent years has become a minefield and we recently saw a report from Mydeposits which indicated that 26% of landlords were unaware of changes affecting mortgage interest tax relief, while a further 23% did not know about the additional 3% stamp duty payable on second home purchases since April 2016.

“For many landlords, an investment in buy-to-let property is one of the most important financial commitments they will make in their life. The returns are commonly intended to help fund retirement, achieve lifestyle goals and/or share with or pass on to family.
“Why would anyone invest significant time and money into a venture without understanding the implications?

“At Commercial Trust it is our job to keep up to date with regulatory changes and how these will potentially affect our clients, information which I share on a regular basis and I welcome any landlord to keep in touch.

“If you have any uncertainty regarding your investment plans, it is always best to seek expert advice before making a commitment.

Remortgages accounted for 70% of buy-to-let lending in July

Colourful door housesNew data shows that 70% of all buy-to-let lending in July related to remortgages, the highest figure since 2009.

In total, homeowner remortgages reached £6.7 billion in July from 36,800 individuals, which represents an increase of 12% in pound notes and 10% in the number of people year-on-year, according to UK Finance.

June Deasy, head of mortgages policy at UK Finance, said:

“Remortgaging strengthened in July and reached its highest level since January, with customers attracted by borrowing rates that are at or close to their historic low point.”

The data also showed a slight year-on-year increase for buy-to-let lending in July, which totalled £3.2 billion and 20,500 mortgages.

Andrew Turner, chief executive at Commercial Trust commented:

With interest rates remaining low and a record number of buy-to-let mortgage products available, it is a great time for landlords to remortgage. It is also natural that the split of lending would favour remortgages, given the financial impact on the industry of recent government changes.

“Of course bank rates may rise in the future and there has been much speculation about whether the Bank of England will decide to increase rates at its next Monetary Policy Committee meeting. An increase could result in lenders raising rates on buy-to-let mortgage products, so it is easy to see the allure of locking-in to a low fixed rate, especially given the attractive 5- and even 10-year buy-to-let deals currently available.

“Whilst changes in the industry have had an impact on landlords’ finances, the fact that buy-to-let lending increased in July really does serve as testament to the resilience of this industry and its ability to adapt and change in order to drive profitable returns.

Post-PRA 'car crash' predicted for buy-to-let

A leading expert has outlined the lack of clarity that still pervades in the buy-to-let industry over the new PRA rules that buy-to-let lenders must meet by September 30th.

Broker David Whittaker described the likely scenario as a ‘car crash’ as he spoke on a panel at the Financial Services Expo.

Whittaker suggested that there is a clear lack of knowledge among landlords, while lender information on their plans has been vague – which is likely to create an atmosphere of confusion from October 1st.

He was also critical of lenders yet to make their post-PRA processes and approach public knowledge.

It’s a bit late in the day for lenders to be saying we’ll announce shortly,” he said. “I wish advisers all the best of luck on October 2 because there’s going to be a lot of white noise around the market.”

“It’s going to be a car crash. Landlords don’t know about it and they’re going to say to advisers, ‘I don’t like what you’re asking me to supply and I’ll go somewhere else’. Four days later they’ll come back to you the adviser and admit you were right,

-- he continued.

The new PRA rules will see a change in the way that lenders underwrite buy-to-let investors who own more than three properties, typically referred to as ‘portfolio’ landlords. It may become harder for landlords to borrow money and the imposition of stricter checks on income could add frustration for many.

Making sense of the new market

Andrew Turner, chief executive at Commercial Trust, commented:

“There has been a drip-feeding process of information, from a number of lenders, on what they intend to do to meet the new PRA rules.

“Some lenders have decided to no longer offer products that will fall under the new definition of portfolio landlords, while others have decided this is a market worth pursuing. In other cases, lenders have simply not made a public response. However, and as one might expect, each lender has interpreted the required changes slightly differently, so as a broker there is a lot to take on board in a short space of time.

“Many landlords are unaware of how the new rules will impact on them. Whilst we are making efforts to spread the word as best we can, I am sure some affected landlords won’t become aware until they actually seek to make their next investment.

“At times like this, it really pays for landlords to speak to specialists who understand not only the changes taking place, but which lenders are offering products suitable for their circumstances.

“Whilst there has definitely been a sense that lenders are lagging behind in their preparations, large brokers like Commercial Trust are better placed to make sense of the changes, quickly, due to the resource we have available.

“I believe the real struggle will be for smaller operators in the field, who have only a few staff available to get to grips with the new rules. I invite any advisor in this position to get in touch with us if they need help in this regard.”

Government launches new housing consultation

Houses of Parliament at nightWith continued pressure to increase the number of houses built each year in the UK, the Government has announced plans to help expedite planning for new homes.

The Government has previously pledged to build one million homes by May 2020, but in line with previous regimes, is currently way off target to meet its goals. In 2016 almost 190,000 new homes were built, with planning permission given on 304,000.

A consultation was launched on September 14th, outlining a number of reforms to the planning process, one of the contributory factors to delays in construction. It will run until November 9th.

Among the proposals announced is a standard method for calculating local authorities’ housing needs, and a statement of common ground to improve how local councils work together.

Communities secretary Sajid Javid believes that the initiatives will result in more properties and improved affordability:

“The housing market in this country is broken. For too long we haven’t built enough homes and we don’t build them quickly enough.”

One of the key plans is to reduce the time and cost to Local authorities who currently spend in the region of £3 million a year on consultants, in order to establish how many new homes need to be built in their region.

Under the new plans however, lengthy debates and planning arguments will be alleviated.
Javid stated:

“This new approach will make sure we have a clear and realistic assessment of how many new homes are needed, and ensure local communities have a voice in deciding where they go.”

Andrew Turner, chief executive at Commercial Trust, commented:

“It is good to see the Government acknowledging the problems of the UK housing market, which have been evident to everyone for a long time.

“Certainly any process that speeds up planning decisions will be helpful, but the target of building one million new homes by May 2020 remains an enormous challenge.

“The problems go beyond just planning and construction resources in the UK are stretched as it is, so a lot more needs to be done.

“On the basis that more houses are built as a result of these proposals, some pressure will be taken off the housing market. Availability of property is an important consideration, but so too is affordability of housing for many young people, wanting to get on the property ladder.

“If building more affordable houses is a result of this initiative, then demand for property could fall. In the meantime, there are many hurdles to be crossed and there is still enormous need not only for affordable new homes but also rental properties, creating a sustainable buy-to-let industry.”

RICS fears rental growth will outpace house prices

Modern stylish flatsAs demand for rental homes continues to outstrip supply, rental prices are expected to outpace house price growth over the next five years, a new survey from the Royal Institution of Chartered Surveyors (RICS) has reported.

Paul Bagust, from RICS, described the findings as “concerning”, especially given house price rises.

The organisation reported that UK house prices rose marginally in August, although the national figures do not distinguish regional differences in performance, with areas like Northern Ireland seeing widespread increases in the past quarter, while London and the South East experienced a fall in prices for the same period.

Bagust said:

“A functioning private rented sector is crucial to a healthy housing market and it’s predicted that over 20% of all households will be PRS by 2020. The sector is extremely diverse, including many one home landlords.”

The report also highlighted fears that recent government changes to the buy-to-let mortgage industry could spark an exodus of landlords over the coming year. 61% of surveyors spoken to believe that landlords will leave the buy-to-let market in the next 12 months, while only 12% anticipate more newcomers.

The data also revealed that 52% think there will be a net reduction in the number of landlords over the coming 3 years, as opposed to 17% expecting to see an increase in volume.

Andrew Turner, chief executive at Commercial Trust, said:

“There are many factors that will determine whether buy-to-let investors decide to leave or stay in the industry – and equally whether the market is able to attract new landlords.

“Certainly the government changes concerning the loss of mortgage interest tax relief, the ‘wear and tear’ allowance and the introduction of the 3% stamp duty surcharge, have affected the finances of buy-to-let landlords.

“At the same time though, house prices and demand for rental properties, combined with competitive interest rates, have created opportunities for other investors.

“Buy-to-let investments continue to deliver good yields and as long as that remains the case, there is no reason to anticipate a mass exodus of landlords.”

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