Buy to let: A New Dawn 1st Feb 2017
Heraclitus, the Greek philosopher, said that “the only constant is change.” Well that’s certainly been true for the buy to let market in the last 18 months! The New Dawn is here and we are all wakening up to a new buy to let world.
George Osborne surprised and shocked with plans to reduce landlord tax relief in his 2015 Budget. He also imposed an extra 3% stamp duty on investment property purchases, and removed the wear and tear allowance. Since then, the market has been coming to terms with this. Some landlords have sold up. Others are going down the limited company route. If you haven’t looked at this yet, then it would be a good idea to chat it through with your accountant soon as your profitability will start to be hit from this April.
As if that wasn’t enough, 2016 was a bizarre year and 2017 is shaping up to be quite a humdinger too. In 2016, Brexit saw the UK’s relationship with Europe change forever, a new Prime Minister arrives at Number 10, Labour self-destruct and the adoption of a whole new regulatory approach to our mortgage market – ironically, much of it from Europe. The Bank of England, through the Prudential Regulation Authority (PRA) also “recommended” that lenders increase their rental stress tests and the stress rates that they use to calculate rental cover, in part to accommodate the changes to the 2015 tax changes.
2017 will see Brexit continue to unfold and we have just witnessed the election of the most controversial US President in history. This year will reveal the real impact of the events of the last couple of years for the buy-to-let market.
So what are the consequences? Most lenders have now adjusted their rental cover calculations and stress test rates. 2017 will therefore be about adjusting to this new lending regime. Some lenders have lower rental cover calculations or different ones for different people. For example, BM Solutions took the creative approach of ‘tailoring’ its rental requirements for higher rate clients, which will prove popular. Virgin will stress test pound for pound remortgages at their old rate. Some lenders are also taking personal income into account where the rent doesn’t justify the loan.
From an investor point of view, there are a number of consequences. A major one is that the changes to the rental cover means that the rental you can achieve for a property may restrict what you can achieve as a maximum loan. Purchases will be particularly affected with larger deposits being required and an extra 3% stamp duty. Buyers will then look at locations they’ve perhaps not given too much attention to before. Cheaper areas will become more popular where there is still a great rental yields available. Auctions will be looked at again.
Holiday lets have also become more popular in the last couple of years, with AirBnB driving this change. Landlords need to take care as a buy to let mortgage does not permit short lets so the property cannot be used for this purpose unless it is remortgaged. Standard landlords insurance doesn’t cover AirBnB and is also a different taxation class. Specialist mortgages are available if you are considering this, or already doing it and want to sort the mortgage.
Mortgage rates are impressively low on buy-to-let deals at present and will stay there for a while, however long term fixed rates are forecast to rise.
The PRA rules will present challenges and make applications more time-consuming, particularly for large portfolio landlords. It will take a while for landlords, brokers and lenders to get used to this new buy to let mortgage dawn.
As expected, the market dropped off as people adjusted to it. Lending fell off significantly in 2016 although the last quarter was back up at 2015 level. We are starting to see volumes picking up as landlords get their heads around the changes.
These recent changes mean that finding the right buy to let mortgage for you will become much more difficult as the mortgage market becomes even more complex. More blended solutions and combined approaches will be used. Commercial finance is back in vogue, and second charge and bridging are much more common as landlords look for more innovative solutions and residential buyers need more guidance.
It may be a good time to revisit your investment strategy and to chat this over with your mortgage broker, your accountant and your letting agent.
Malleny Mortgage Solutions
0131 344 4301