Buy-to-let news to Friday, September 29th, 2017.

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University towns see house prices soar 22% in 3 years

House prices in UK university towns on average increase by 22% over the three years of a degree course new research has shown.

A survey of 65 university towns revealed that the average house price has risen from £172,179 to £210,845 in three years, an increase of £38,666, equivalent to a rise of £1,074 per month or 22.5% since 2014.

The data, unveiled by the Halifax, shows that the leading 10 university towns with the largest price growth are all located in southern England with Guildford, where the University of Surrey is located, coming out on top, after showing average increases of £105,362.

Hot on the heels of Guildford came Winchester, Uxbridge, Oxford and Cambridge.

The greatest percentage increase was recorded in Bedfordshire, where house prices increased by 42% from £200,086 to £284,707 in the last three years.

Commenting on the findings of the research, Russell Galley, managing director at Halifax Community Bank, said:

While it is well documented that the student housing market can be lucrative for private landlords receiving monthly rental incomes, this research also indicates the potential earnings from bricks and mortar alone.

Andrew Turner, chief executive at Commercial Trust Limited, reflected:

The results of this survey underline the opportunity for buy-to-let landlords in student towns.

“The influx of students every autumn increases the already high level volume of demand for rental properties in towns and cities across the country.

“Whilst also receiving a regular income from rent, investors are seeing the actual value of their property soar and a 22% increase in capital growth over just three years represents a phenomenal return.

Landlords and brokers prepare for underwriting changes

Row of terraced housesLandlords and brokers are bracing themselves for potential upheaval as significant changes to the underwriting rules for buy-to-let properties could make borrowing more difficult.

The Prudential Regulation Authority’s (PRA) new underwriting guidelines for portfolio landlords, commence from September 30th and for brokers, there is the challenge of understanding the varying approaches that lenders have adopted.

Under the new rules, lenders will have to take into consideration all of the rental properties (whether mortgaged or not) in a landlord’s portfolio, when underwriting a new application.

Whilst the changes have been coming for some time, the lending landscape has been one of confusion, as the rules are open to interpretation, which has led to different approaches. Some lenders have simply decided not to lend to portfolio landlords.

This has caused uncertainty not only for landlords, but for broker firms too, with a Kent Reliance survey in August, indicating that only 54% of brokers were comfortable that they fully understood the PRA changes and what these would mean for their own businesses.

Andrew Turner, chief executive at Commercial Trust Limited (, said:

Without a doubt the information coming through from lenders has been slow, some updates are still being sent through.

“There has been a decidedly mixed reaction to how lenders intend to address the second phase of PRA changes and it is completely understandable why landlords might feel perplexed.

“As one of the largest UK brokers Commercial Trust is lucky to have the capacity to absorb and roll out the changes where others may struggle.

“We look forward to helping portfolio investors navigate the changes and it is always our aim to achieve successful mortgage completions with the minimum of stress to our clients.

“The bottom line is that, if you are affected, the process may take longer and you may have to provide more paperwork, but for us it is the age old adage – keep calm, and carry on.

More landlords passing costs on to tenants

Landlord completing a formNew data shows that 35% of landlords put rent up during August, up from 27% in August 2016, as the effects of rising costs begins to impact on the private rental market.

Data from the Association of Residential Letting Agents (ARLA) monthly report indicates that letting agents saw landlords increase rent by the highest rate since July 2015.

The ARLA report also showed that only 2% tenants successfully negotiated a rent reduction, falling from the previous month, when 2.5% managed to lower their rent costs.

Despite rental increases, demand from prospective new tenants rose to 72 per member branch in August, from 70 in July, while the volume of landlords selling their buy to let properties remained the same as May, June and July this year, with an average of three for sale per branch.

This month’s findings paint another bleak picture for tenants. In November last year, only 16% of agents saw landlords increasing rent costs, but that figure now stands at 35% which is likely to continue rising,

said David Cox, ARLA chief executive.

Andrew Turner, chief executive at Commercial Trust, commented:

This data underlines how government policy has completely missed the point. Legislation is being introduced to supposedly safeguard tenants from costs like letting agent fees.

"However, by creating a taxing environment for landlords, the government has made it economically much harder for landlords to derive adequate income and these costs are now filtering down to tenants.

“These figures are therefore not much of a surprise to anyone within the industry – and with mortgage interest tax relief continuing to fall each year to 2020, when it will be capped at 20%, we can probably expect more of the same.

“Demand for rental homes continues to exceed supply and this, when combined with additional costs facing landlords, is putting pressure on tenants who already cannot afford to buy a home.

Buy-to-let sector still unprepared for tax changes

To let sign outside converted apartmentsConcerns have been raised that many buy-to-let landlords remain unprepared for important tax changes affecting the sector.

The biggest fear raised by Andrew Browne, head of tax at Bishop Fleming, is the impact of the loss of mortgage interest tax relief; this has been phased out since April 2017 and will reduced to 20% by April 2020.

Landlords no longer receiving this full benefit, who fail to take action, could end up renting out properties at a loss. This in turn, if left unaddressed, could ultimately see them financially forced out of the industry with a number of basic rate taxpayers potentially forced into a higher rate tax bracket, as a greater proportion of rental income becomes subject to tax.

Whilst speculation has suggested that for many landlords, the answer is to transfer their properties into limited companies, Browne sounded a note of reticence about this concept:

I would caution against transferring personally owned properties into a company to save tax without thinking through the consequences, as it is not always the most sensible move, and may prove to be an expensive mistake in terms of capital gains tax, stamp duty and inheritance tax, as well as the extra re-mortgaging costs.

"Even where properties are transferred, tax will only be saved where the money is left in the company, as taking it out will result in the payment of dividends tax," he adds.

Andrew Turner, chief executive at Commercial Trust Limited, said:

There has been so much information for landlords to take in recently; it is easy to overlook some of the issues that now affect them.

“However, buy-to-let investment is a business and should be managed accordingly, taking into account market and legislative changes that influence profitability.

“Before making any spur of the moment decisions, it is vital to seek specialist advice, particularly on potentially complex tax issues.

“For many landlords, buy-to-let offers an opportunity to receive an extra income through rent. Often landlords may only own one or two private rental homes and the impact of these changes could be devastating for their finances, so it is critical to understand what has been introduced and then plan ahead.

“Once an investor has a clear picture of their situation and potentially changing objectives we, as a specialist broker, can go into the marketplace to identify a suitable buy-to-let solution. I look forward to demonstrating the benefit of our service to any landlord who needs help of this kind.

Call for mortgage interest relief abolition to be scrapped

Coins and cashOne of the leading industry bodies for buy-to-let has called for the Government to scrap its plans to phase out mortgage interest relief, which could have severe implications for many landlords.

With demand for rental properties still outstripping supply, recent Government changes to add further tax burden to landlords, could not come at a worse time and may push many out of the industry.

The Residential Landlords Association (RLA) has called for the changes to be scrapped, in order to support those investing in the private rented sector, including the country’s small-scale landlords.

In July 2015, the then Chancellor George Osborne, announced that Mortgage Interest Tax Relief for residential landlord’s costs was to be restricted to the basic rate of income tax (currently 20%).

Typically, costs incurred by landlords that have qualified for Mortgage Interest Tax Relief, include: mortgage interest, interest on loans used to purchase furnishings, plus fees charged when the landlord takes out or repays a mortgage or loan.

However, no relief is available for capital repayments of a mortgage or loan.
The process for reaching 20% is a gradual one, as the relief will reduce in phases. This process began on 6 April 2017. The timeframe for completing this transition is as follows:

  • 6 April 2017: In 2017/18, the deduction from property income will be restricted to 75% of the finance costs incurred, with the remaining 25% being available as a basic rate reduction.
  • 6 April 2018: In 2018/19, 50% of finance costs will be considered as deduction, with the remaining 50% treated as a basic rate reduction.
  • 6 April 2019: In 2019/20, 25% of finance costs will be allowable as deduction, with the remaining 75% treated as a basic rate reduction.
  • 6 April 2020: All financing costs incurred by a landlord will be given as a basic rate tax reduction.

From April 6, 2020, all mortgage costs above 75% of rental income will result in the buy to let investments become loss-making. For additional-rate (45%) taxpayers, the threshold at which investment returns are eradicated by the tax is when mortgage costs reach 68% of rental income.

However, the new tax may also impact on basic rate taxpayers as the change could potentially drag them into the higher rate tax band, depending on other income.

Before the changes, a basic rate tax payer letting a property out, was able to deduct the value of interest-only mortgage repayments, as mortgage interest tax relief, on their interest-only mortgage. That meant the rental income declared was the difference between annual rental income less interest-only repayments.

However, from April 2017 that changed, as rental income is now judged on the whole amount, without mortgage interest tax relief deductions.

If the landlord is in employment, depending on their annual salary, the additional rental income value, when combined with annual salary, could push their total earnings into the higher rate tax bracket.

The RLA has called for action to be taken against mortgage lenders who prevent landlords from offering longer tenancies that some renters want, in addition to the introduction of a scheme which would enable tenants’ credit ratings to be enhanced when they have good rental payment histories.

The association has put forward a number of proposals, including calls for the government to introduce tax incentives for those landlords willing to sell properties to sitting tenants, those offering longer tenancies and those investing in energy efficiency improvements.

RLA has stated that where a landlord is prepared to sell a property to a sitting tenant, the 20% rate of Capital Gains Tax should be applied rather than the existing 28%.

DJS Research findings for the RLA report that 77% of private landlords would consider selling their property to tenants if the tax liability was waived.

RLA chairman Alan Ward said:

RLA research shows many landlords have stopped investing in more properties as a result of recent tax changes, instead moving into short term holiday lets or ceasing to rent to groups deemed ‘high risk’ such as the young and those on benefits.

“These decisions have far-reaching consequences for a country in the grip of a housing crisis and we will do everything in our power to convince the government that this unfair tax must be reversed.

Andrew Turner, chief executive at Commercial Trust Limited, commented:

RLA’s proposals make good sense, as the buy-to-let industry needs to provide financial incentives for existing and would-be investors.

“Investing in bricks and mortar continues to deliver good returns for buy-to-let landlords, but recent changes are starting to have a financial impact and these will be fully realised from 2020, with many landlords simply unaware of the implications of the loss of tax relief.

“Any changes in tax circumstances could have a profound effect on investment strategy and we would recommend anyone who is not sure, to seek advice from a tax expert.

“However, whilst these calls for a change to the Government’s plans to abolish mortgage interest tax relief are well thought-out, there remains the concern that they will fall on deaf ears.

Remortgaging accounted for 37% of mortgage market in August

Modern semi-detached housesAugust saw a record number of remortgage valuations in the UK, as it accounted for 37% of the mortgage market, new data has revealed.

The figure represented the highest share of the market in over a decade, as property owners – including buy-to-let landlords, scrambled to lock into cheaper deals.

The report from Connells Survey & Valuation, shows that remortgage valuations have risen by 3% year-on-year, with lender competition and reduced rates cited for much of the movement.

With speculation rife that the Bank of England will soon raise interest rates, the company suggested that many property owners are remortgaging to lock their repayments into lower rates whilst they are still on the market.

Remortgaging is quickly becoming the dominant activity in the lending market. The record high in August was driven by consumers seeking out better value borrowing. Having benefited from a decade of low interest rates, consumers are sensing the risk that this era is nearing an end,” said John Bagshaw, corporate services director of Connells Survey & Valuation,

“Many older mortgage deals are expiring this autumn which will mean moving onto more expensive standard variable rates. As a result, home owners on these deals are opting to refinance, taking advantage of the intense competition in the mortgage market right now,” he explained.

“Despite a slight slowdown in transactions this August, official figures suggest house price growth has held up. This rise in property prices means homeowners could now get a better loan to value ratio when remortgaging than when they first borrowed, potentially allowing them to lower monthly repayments. With so much economic uncertainty and hints of a base rate rise, many are choosing to lock into a lower rate to see them through the next few years,” he added.

Andrew Turner, chief executive at Commercial Trust Limited, commented:

It is not surprising to see so many people looking to take advantage of lower rates on mortgages given the Monetary Policy Committee recently warned that interest rates would be soon to rise. This has an impact upon both the residential and buy-to-let sectors.

“For landlords there are a wealth of reasons to look closely at their portfolios right now. A lot has changed that impacts their financial picture and remortgaging can be one way of quickly achieving a cost saving.

“Purchasing slowed for landlords as they weighed up the changes which has again influenced the emphasis on remortgages in this sector.

“As a specialist buy-to-let broker, we are helping landlords achieve fantastic savings every day. We welcome the opportunity to investigate similar opportunities for anyone who needs our help.

Jeremy Corbyn raises the prospect of controlled rent

Richard Lionheart statue outside ParliamentLabour leader Jeremy Corbyn has suggested that if his party came to power, they would look to control the amount of rent that landlords could charge, in a bid to protect tenants.

Speaking at the Labour Party Conference in Brighton, the leader of the opposition indicated that similar initiatives have been implemented in cities across the world.

He commented:

We will insist that every home is fit for human habitation, a proposal this Tory government voted down. And we will control rents - when the younger generation’s housing costs are three times more than those of their grandparents that is not sustainable.

“Rent controls exist in many cities across the world, and I want our cities to have those powers too - and tenants to have those protections.

“We also need to tax undeveloped land held by developers and have the power to compulsorily purchase. As Ed Miliband said: ‘use it or lose it’. Families need homes.

The Mayor of London Sadiq Khan has supported the introduction of rent controls in the capital, which would be on a par with existing schemes in New York and Paris.

Mr Corbyn’s proposal has been met with mixed reactions, those agreeing, citing that the move would safeguard tenants against exploitation whilst enhancing tenant’s spending power on other goods and services.

However, opponents have openly criticised the concept, suggesting that it will limit landlords, already faced with rising tax liabilities due to recent Government changes – and could see many investors leave the industry.

David Cox, chief executive at ARLA Propertymark, the professional body for letting agents, said:

Whenever and wherever rent controls are introduced, the quantity of available housing reduces significantly, and the conditions in privately rented properties deteriorate dramatically.

"Landlords, agents, and successive governments over the last 30 years have worked hard to improve the conditions of rented properties and this is like taking two steps backwards.

Rent control is not the answer – to bring rent costs down we need a concerted house building effort to increase stock in line with ever-growing demand.

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