2015 was a pivotal year for the buy to let market, and may have laid the groundwork for unprecedented change in the sector. Here is Commercial Trust’s review of the year in buy to let.
The BTL mortgage market continued to boom
Figures from www.cml.org.uk showed that the final quarter of 2014 was a very strong one for buy to let, with gross lending growing by 26% year on year, greatly overshadowing activity in the owner-occupier sector.
Figures for the rest of 2015 (which are currently available until October) show that robust year-on-year growth continued. This was driven largely by remortgage activity, particularly during the summer months, as landlords switched to new and increasingly competitive deals.
By the end of the third quarter, gross buy to let lending accounted for almost a fifth of mortgage lending in total. This was a cause for alarm for some, including policymakers from both the Bank of England and the Treasury, who began to make with increasing frequency the case for market intervention. (More on this later in the article.)
Buy to let criteria strengthened and interest rates fell
2015 saw some bold product innovations in the buy to let market, as well as a continuing downward trend in product cost.
- January saw the launch of the only ten-year fixed rate on the market
- A number of new lenders launched over the course of the year, increasing competition for business and further driving improvements in the market
- In what was perhaps a prescient move, given later developments, one lender in February announced that they would accept applications from limited companies; a market that, as of the onset of 2016, appears to be improving
- Some lenders broadened their criteria to accept first-time landlords, whilst others announced that they would accept applications from non-homeowners
- Several lenders moved to court older borrowers by loosening their maximum age criteria (www.landlordzone.co.uk)
- Capital raising criteria improved, with one major lender announcing that it would accept capital raising for personal use
- The second charge mortgage market grew
- Prospects for landlords with impaired credit improved, as a number of lenders relaxed their criteria around historical faults
- Some lenders expanded their new-build criteria, allowing more landlords to invest in new properties
Property price growth slowed during the year, but still remained strong
Compared to 2014, house price growth in 2015 was subdued, particularly in the latter half of the year. According to the Nationwide House Price Index, year-on-year growth between June and November remained below 4%.
December saw a pronounced monthly upswing of 0.8%, however, bringing yearly growth to 4.5%.
Between rising employment and wages and lacklustre construction activity, Nationwide’s economists expect price growth to accelerate slightly in 2016.
The May Election was fought over bricks and mortar
Because of the way votes translate into parliamentary seats, the 2015 General Election results don’t adequately show just how close it was. But it was close indeed, and despite a wealth of ideological battlegrounds, one of the main issues the parties grappled over was property.
The Conservative Party won with a surprise majority, albeit narrowly. This seemed at the time like it would be a positive development for property investors, but shock twists in the months since have suggested that the sighs of relief were, perhaps, premature…
Landlord tax law will undergo a dramatic change
In the July 8 Summer Budget – the first all-conservative budget for nearly two decades – Chancellor George Osborne stunned landlords by announcing that income tax relief for buy to let mortgage interest would be scrapped, and replaced with a 20% tax reduction.
The aim, he said, was to prevent unfair tax advantages from being granted to the wealthiest landlords. By increasing taxable income, however, the measure runs the risk of pushing lower income landlords into higher-rate thresholds, as shown in our analysis: Budget 2015: the hidden cost for landlords.
Relief will be withdrawn gradually, in 25% chunks, beginning with the onset of the 2017–18 tax year and ending in April 2020.
In December, a landlord group announced that it would be mounting a legal challenge against the decision on the grounds that it breaches European law and human rights legislation.
The wear and tear allowance will also be reformed…
Also in the Summer Budget was the reform of a tax relief for fully furnished properties called the ‘wear and tear’ allowance.
Currently, landlords of fully furnished properties can claim 10% tax relief each year, irrespective of refurbishment costs actually incurred. The new allowance will be available to all landlords, who will only be able to offset actual refurbishment costs.
The government ran a consultation on the changes between 17 July and 9 October, and published the policy paper, reform of the wear and tear allowance, on 9 December.
… and stamp duty will be increased
Landlords remained in the chancellor’s crosshairs. On 25 November, when delivering the Autumn Statement 2015, Mr Osborne announced his second surprise tax change: that from April 2016, landlords and individuals buying second properties would be subject to a 3% surcharge on stamp duty land tax (SDLT), increasing purchase costs by hundreds or even thousands of pounds for investors buying all but the cheapest properties.
On 28 December, HM Treasury published an open consultation setting out the details of the changes. The consultation will close on 1 February 2016.
Meanwhile, HMRC has been cracking down on landlords
The Telegraph reported in January that the 2013–14 tax year saw a 24% increase in capital gains tax receipts, as HMRC continued to commit more resources into investigating landlords.
HMRC’s Let Property Campaign, which allowed landlords who had underpaid their taxes to come forward voluntarily and receive a discounted penalty, reached the 18-month mark in March. HMRC later announced that the campaign had resulted in 10,000 landlords disclosing more than £50 million in unpaid tax.
Landlords who need to disclose unpaid tax can find out how to do so on the government website: www.gov.uk/let-property-campaign
Pension freedoms opened the door for ‘silver savers’
The 2015–16 tax year, which began on 6 April 2015, saw the implementation of the ‘pensions flexibility’ rules that had been formulated by the previous government and announced in the March 2014 Budget.
The new system allows over-55s to access their defined contributions pension funds more flexibly, including withdrawing larger lump sums at lower tax rates.
When these changes were first announced, experts predicted that they would fuel the purchase of buy to let properties as older savers sought better returns. Commercial Trust’s data for the year supports this prediction, showing that the proportion of applicants aged 55–59 increased from 7% in Q1 to 18.5% in Q2.
Furthermore, it was announced on 6 December that, from April 2017, people with an existing annuity would be able to exchange it for a cash lump sum through a new ‘secondary annuity’ market.
The gulf between amateur and professional landlord investors grew
Though the divide already existed, 2015 felt very much like the year when a true distinction between amateur and professional investors began to be drawn in the eyes of the public.
In January, HM Treasury published a summary of responses to its consultation on the EU Mortgage Credit Directive (MCD), including proposals to implement a framework for ‘consumer buy to let’; that is, lending to individuals who do not enter the market for mainly business purposes, such as ‘accidental landlords’. Legislation bringing these individuals under Financial Conduct Authority (FCA) regulation will take effect in less than three months.
Meanwhile, the National Landlords Association (NLA) warned new landlords not to rely solely on capital gains, in response to a survey that suggested confidence among landlords in house price rises had almost trebled in two years.
In response, Carolyn Uphill, NLA chairman, intimated that landlords should remember that “they are in the business of providing homes for people.” She highlighted the risk in relying only on a capital windfall at sale and stressed the importance of forward planning for those thinking of “taking the plunge”.
Tax changes will likely see the gulf widen further
The transition from full mortgage interest tax relief to a 20% tax reduction that is due to begin in April 2017 will only affect individual borrowers; limited companies, who pay corporation tax rather than income tax, will be exempt. Experts predict that the number of landlords transitioning to limited companies will increase markedly over the next year.
In addition, the consultation for the implementation of the 3% stamp duty surcharge for additional residential properties this April proposes that both individuals and companies making bulk purchases of 15 or more properties be exempt from the surcharge. An exemption may also apply for buyers with existing portfolios in excess of 15 properties.
Interest rates, and inflation, remained low throughout the year
Despite predictions to the contrary, the Bank of England Base Rate (BBR) remained at its all-time low of 0.5% for the entirety of 2015.
After five consecutive months of voting for a 0.25% rate rise, Monetary Policy Committee (MPC) ‘hawks’ Ian McCafferty and Martin Weale fell back in line in January 2015, as figures showed a marked dip in CPI inflation for the previous month (www.ons.gov.uk).
The UK experienced persistently low inflation, and occasionally deflation, for the remainder of the year. This did not stop Ian McCafferty from resuming his calls for a rate rise in the summer; to date, however, he has been consistently outvoted 8–1.
Why have rate rise predictions been so frequently revised?
Numerous factors have stayed the MPC’s hand this year, not least among which was the global financial market crash in August. Delays in the anticipated rise of the Federal Reserve rate in the US also caused concern (the Federal Reserve eventually increased the US benchmark rate on 16 December), as did worsening UK growth.
Markets currently expect the first rate hike to come around the turn of next year, according to the Telegraph. Time has proven that these predictions are far from solid, however; if 2016 were to see increasing inflation, falling unemployment and a strengthening economy, a rise could come sooner.
A recent spike in swap rates might also indicate that the cost of fixed rates will rise in the new year, perhaps in response to concerns raised by both the Treasury and the Financial Policy Committee (FPC) about risky mortgage lending – more on this below.
The Bank of England called for buy to let regulation
In October 2014, the FPC requested from the government the power to intervene in the mortgage market if it felt it necessary to curb excessively risky lending and house price inflation (www.bankofengland.co.uk).
The government granted the FPC powers of direction over owner-occupied lending, but not for buy to let lending, the case for which it said it would revisit in 2015.
As the buy to let boom of 2015 reached its zenith in July, the Bank of England warned that the buy to let market “could pose a risk to financial stability” in the event of interest rates rising – seeming to renew its call for regulatory powers to be granted.
In October, George Osborne appeared to claim that powers of direction would be granted without the consultation that had previously been promised. In December, however, the consultation was finally launched.
Financial Policy Committee powers of direction in the buy to let market will close at midday on 11 March 2016.
With you for 2016 and beyond
Commercial Trust is committed to giving our clients, new and old, the very best possible buy to let mortgage recommendations, whilst helping to arm them with the knowledge needed to succeed as a landlord.
The link below leads to our guide to buy to let for 2016 and beyond, which examines the issues that this article has discussed and ways that landlords might adapt to changes in the future.