The current landscape for Landlords is a confusing one - it used to be that you could buy a house, bung it on the market with an over-gelled cheap-suited teenager to find you a tenant and sit back and watch the money roll in (okay, so it wasn't ever quite that simple but you know what I mean) - in contrast to the modern Landlord who must tread carefully through a minefield of legislation, most of which comes at significant cost when preparing a property to let.
The latest factors that are causing a stir are the newly proposed rules surrounding the regulation of Buy To Let mortgages which will be governed by the FCA from 2016 onwards. The newly proposed rules will set in stone a solid line between 'consumer mortgages' (where money is lent to an individual in order to purchase a dwelling for their own personal use) and 'commercial' mortgages (where, for example, an existing Landlord purchases a property for the sole purpose of commercial gain via renting the property to a third party).
The crux of the issue is that, from the date of the changes, consumers will be protected by FCA rules on consumer protection which will ensure that any 'dodgy' mortgages will be a thing of the past, however it will eliminate the grey area that exists with buy-to-let, meaning that nearly all multi-let portfolio landlords will no longer enjoy consumer protection under the FCA when purchasing mortgages, and lenders will have more stringent checks to find out precisely the purpose of the loan.
In order for a mortgage to be protected under these new rules, more than 40% of the property must be used for residential purposes by the owner or the owners family. This has further implications as it could mean that Landlords wishing to retain their consumer protection may leave a locked room for 'family' but this could then see them being construed as a resident landlord, meaning any AST granted on the property could later be deemed invalid by the court in the event of a dispute. It may be wise to investigate this with a Solicitor prior to determining your future BTL strategy.
This change will obviously have a ripple effect, one of which will feed into the coffers of HMRC as the pools of landlords in each camp will be easy to identify for taxation purposes. This will also be accompanied in 2017 by the removal of the higher rate mortgage interest tax relief for Landlords earning in the 40% tax bracket. These reforms were introduced by George Osbourne and have created uproar in the Landlord community as many Landlords will now be paying the flat rate of 20% on all mortgage interest from 2017.
The impact of this in simple terms is that any Landlords running a portfolio with a very tight profit margin (i.e. their yield is low, their capital growth is slow and their borrowing is high, leaving very few pennies in the pot for repairs, maintenance and income) will be forced to shrink their portfolio, borrow more, or sell up. Unless the process is handled carefully, the flood of property on the market could cause a shallow correction, which no doubt would be welcomed by many first time buyers and those keen to move up the property ladder in the coming years, even though everything is relative so values across the board would fall. This would however bring property prices close to average earnings which would make property ownership more affordable across the nation.
Some have touted the changes as a good thing, since the mortgage rate relief tax currently enjoyed by Landlords costs the taxpayer £6.3 billion per annum, and in some instances where Landlords operate their Buy To Let portfolios through a company rather than via personal accounts, in instances where the interest on borrowing the funds exceeds the rental income from the portfolio, Landlords may claim mortgage interest rate relief, as well as a personal tax refund and walk away with net profit, courtesy of the taxpayer.
The UK Landlord sector has enjoyed a buoyant age, where many have made their fortune in the sector, some even able to give up their day jobs entirely to focus on creating an income from purchasing and letting property, which is why the massive vehement opposition to the proposed rules is so forceful. On top of everything else, Landlords costs are set to rise which will precipitate a stark choice for those at the lower end of the income scale from their properties, assuming no income can be derived from elsewhere - the rent must increase, or the property must be sold.
My prediction is that Landlords will still retain their income and their property, however the new rules and changes will have a cooling effect on the BTL bubble, creating a situation where sadly some Landlords will be forced to sell, but many can own one or two properties and derive a bolstering income from them, however the days of total income replacement and financial freedom through property may be numbered. The changes will generate more affordable property for first time buyers and home ownership could be set to increase if Landlords are pushed to sell properties that are no longer economically viable as investments. The public are heavily divided on the issue - no Landlord wants to lose their income stream, yet with the UK population increasing day by day, the demand for homes is putting more and more pressure on the housing market. It is likely that capital values will continue to steadily increase, albeit at a potentially slower rate in some areas, which may come as some small financial comfort to those who stand in the firing line.
The other looming spectre which nobody seems to be talking about (other than The Daily Mail today) is that interest rates, at some point, will have to rise. With UK Buy To Let mortgage lending currently riding at £33 billion, even a 1% rise would have a massive impact - there are currently 11.1 million buy to let mortgages in the UK, so doing some very fuzzy maths that means that every individual has borrowing of just under £30,000 meaning that a tiny rise adds £300 to every annual interest payment, on average. Those old enough to remember will note that we are enjoying a very nice interest rate holiday at the moment - from 21 Jul 1988 to the 4th September 1991 the interest rate never sank below 10% and reached a high of 14.875% in October 1989 - interest rates rising to that level now would see a rise in interest payments to over £4,000. While it may be tempting to make hay while the sun shines, and indeed it is sensible to do so, having an exit strategy is also vitally important.
My advice therefore is to keep a keen eye on interest rates. Consider your exit strategy, keep up to speed with new regulation and legislation - all of this should be easy as a professional portfolio Landlord as you will have the time - but if you're working and juggling a family as well, it doesn't have to be Hawk & Chadwick, but I strongly recommend you sit down with a hard working independent local agent that you can get to know and trust and hash out a deal for them to help you manage your properties - remember that just as you are an expert in your professional field, they handle property every. single. day. Any agent worth their salt will run your portfolio as if it were their own.
I hope this article has given some insight into just some of the changes to the Buy To Let landscape and I also hope that it has helped bring focus to areas of your portfolio that may need attention. We're all in this together, so if you need my help please call me on 01582 346 111 email me on alasdair@hawkandchadwick.co.uk or come and see me in St Albans (you will need to make an appointment first), always happy to help.
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