Buy to Let - What Next? 1st May 2016
The property market today is unrecognisable from where it was just a few decades ago following Right to Buy in 1980, the introduction of buy to let mortgages in 1996 and latterly the Help To Buy scheme. The 1988 housing reforms that improved the rights of private landlords mean that we now have a private rented sector that accounts for one in five properties. Recent forecasts have predicted that this could grow to one in three properties by 2032 as demand continues to outstrip supply. There are around two million buy to let investors in the UK and this year total housing wealth owned by landlords has overtaken that held by mortgaged owner-occupiers for the first time.
The UK property market has been a good investment in recent years and has attracted interest from across the globe, which is driving capital growth, particularly in London. Recently the Government has sought to curb the buy to let market with the introduction of an additional 3% stamp duty and restricting tax relief for landlords on mortgages from April 2017.
In addition to these changes, the Bank of England has suggested to lenders that they increase their affordability models and reduce maximum loan to values, which would make it more difficult to get a buy to let mortgage. The first major lender has now announced these changes and more are expected to follow. These changes are on top of increasingly complex regulation around letting with many new rules being introduced over the last few years.
Most landlords will be unaware that the European Mortgage Directive brought in new rules for buy to let mortgages making it more difficult for new landlords to get a BTL mortgage. All those involved in financing BTL now have two different sets of rules depending on whether someone is a consumer or business buy to let investor.
Many pundits have said that these changes will cause the death of buy to let, but will they? While these changes will make landlords think longer before investing, there are still opportunities in the property investment market. The economics behind the market are also still compelling.
• One of the key drivers is that demand is forecast to continue to outstrip supply. This will continue to increase property prices.
• Rising property prices mean that many people are unable to afford to own a home so will need to rent.
• Some people prefer to rent as their circumstances are more fluid with changing family circumstances and employment market.
• Most landlords (63%) own only one property that they rent out. 95% of landlords own five or fewer properties. Many landlords, particularly older landlords who may have more equity in their properties, think that the new changes will have little impact on them.
• The current low interest environment looks set to be here for a while meaning it can be difficult to find good returns on savings so people look for other opportunities.
So who will these Government changes impact on?
The recent changes to affordability models and maximum loan to value recommended by the Bank of England will mean that many existing landlords are unable to meet the rental calculation when they come to remortgage, particularly for properties with a lower rental cover. These landlords may be forced to remain on the lenders standard variable rate (SVR) once their current deal ends making them mortgage prisoners.
It will also mean that new investors will need a bigger deposit to be able to buy a property. They may also move away from higher value properties as a result of the 3% extra stamp duty and lower rental cover making it more difficult to get mortgage lending.
The Mortgage Works (TMW) are one of the biggest buy to let lenders and the first to make these changes with rental cover increased from 125 to 145% and LTV down from a maximum of 80% to 75%.
The new European mortgage directive will also place extra hurdles for those wanting to become landlords for the first time, such as people wanting to hang onto an existing residential property to turn it into a buy to let when moving up the property ladder.
What opportunities will there be for anyone wanting to invest in the buy to let market?
The mortgage market is reacting quickly to the recent government changes. Many landlords seeking to consolidate or grow their portfolios are considering doing so within a Limited Company (Ltd Co) as it may offer them a better return despite the costs of administering a Ltd Co. Lending to a Ltd Co used to be restricted largely to commercial lending but a large number of buy to let lenders are now offering mortgages to Ltd Co’s. This could limit the income tax implications.
There are still great term deals for almost every situation but landlords are being urged to grab these now while they are still affordable.
Any landlord who may need to remortgage in the near future should consider doing so now while these deals are still available.
Bridging is also seeing significant growth as people look for other ways to capital raise. This can be used to fund purchases and renovations. It is also becoming more popular for auction purchases.
Landlords have seen many ups and downs in the market over the years. They are resilient and view their properties as long term investments.
There will always be opportunities in the market and it will be interesting to see how these latest changes shape the market.
Malleny Mortgage Solutions
0131 344 4301