In a recent interview conducted for The Sunday Times, Nigel Terrington, the chief executive of Paragon Bank for the last 28 years, says he has witnessed the growth and indeed the boom in buy-to-let lending over his lengthy career with the bank, but that myths surround buy-to-let.
Having weathered many storms throughout his long career, in particular the financial crisis of 2007-8, which nearly brought down his organisation, he sees the current housing crisis as serious but not insurmountable for landlords.
Some landlords are leaving the private rented sector he acknowledges, due to an ever more complicated regulation regime, increased taxes and rapidly rising mortgage rates, which among other factors are bringing down house prices and driving up rents.
Despite this, Terrington remains bullish about the future for the private rented sector and Paragon. He wants to dispel what he says are the “myths” surrounding the role that buy-to-let and the private landlord plays.
Reflecting on the view that although some amateur landlords are leaving, most professional landlords – those with portfolios of properties as opposed to just one or two – and the ones his company targets, Terrington is confident that these landlords will survive and thrive.
“Its deep rooted in the British psyche, if you go back into black and white movies you had the evil landlord with his top hat and his big evil moustache throwing the widow and child out in the cold. And then in popular TV terms you had [sitcom] Rising Damp and [the miserly landlord] Rigsby. You can laugh at it but it settles in people’s psyche,” says Terrington.
But Mr Terrington is not laughing when he sees buy-to-let, which is obviously close to his heart, as an incredibly misunderstood product. A product that has seen his company deliver 75,000 mortgages and spawned a whole new industry since the advent of the buy-to-let mortgage more that 20 years ago. This industry he also sees as the focus of another great myth: the perception that investing in buy-to-lets is risky.
According to paragon’s experience says Terrington, over a 25 year history, mortgage arrears [debt] by buy-to-let landlords have actually been lower than those for owner occupier mortgage holders in every year, but just one.
It’s been tough for landlords and for tenants
Nevertheless Mr Terrington acknowledges there’s been an exodus of private landlords, faced with a less favourable tax regime and, more recently, rapidly rising mortgage costs after thirteen consecutive bank rate rises to 5.25 per cent.
The resulting lack of supply in the sector is making tenants’ lives difficult, with costs having to be passed on in terms of rent rises and a scarcity of rental accommodation. It means that every vacancy is literally being fought over. Rents have risen by 5.3 per cent in the year to this July, the biggest jump since the Office of National Statistics started monitoring rents in 2016. And last year, according to NRLA figures, 153,000 landlords left the private rented sector.
The Section 24 tax changes introduced by George Osborne, the then Chancellor in 2017, gradually reduced the amount of mortgage interest relief landlords could claim, to zero. This was replaced with a tax credit of 20 per cent, but its tax effect on income for landlords with mortgages, especially for higher rate tax payers, was dramatic. Couple this with the current higher mortgage repayments and some landlords a barely making a profit.
For a man who coaxed his company through the banking crisis in 2007 by sending out a copy of Rudyard Kipling's poem “If”, in order to encourage his executive team to “keep your head when all about you are losing theirs”, he sees the current crisis as a mere blip in his company’s history, though he is concerned at the myths and the amount of legislative red tape landlords face.
There are 168 separate pieces of legislation extant, and with the anxiously awaited Renters Reform Bill, that will add another layer of complexity and restrictions. For example it will make it more difficult to evict tenants.
OPINION: Some experts have proffered the view that the new measures in the Renters Reform Bill 2022-23 will make it easier to evict tenants, but this writer begs to differ. Yes, there are some proposed measures in the bill that in theory strengthen the arm of the landlord to effect a necessary eviction. This by the expansion of the number of mandatory grounds in Schedule 2 of the Housing Act 1988. But it's now incumbent on landlords or their representatives to provide enough evidence to convince a judge. This can be a time consuming and expensive process. Given the current state of the county courts system, the inability to access justice in a timely manner, and the fact that cases can be long drawn out, evictions will inevitably be more difficult that now using Section 21. This will be especially so with the introduction of the new Housing Loss Prevention Advice Service (HLPAS) being offered to tenants. With this development there’s always the prospect of a long drawn out and expensive court case - sometimes even involving a counterclaim - if the tenant receives free legal aid assistance.
The professional landlord
As Mr Terrington says, many of the larger professional landlords his company finances are less affected by some of the punitive tax measures that many of the small-scale one or two property landlords face. That’s because they operate though limited companies.
It’s debatable whether a landlord with just one or two properties would benefit from incorporating, operating through a limited company. It would be expensive for most of these operators to transfer an existing investment property to a company. There is stamp duty to pay on transfers and potentially capital gains tax as well, when the property is sold to a company. Accountant’s fees are quite a bit more expensive for dealing with limited company accounts, as opposed to completing tax returns for personal accounts.
Despite all of this Terrington - as you might expect, being in the business he’s in - is optimistic for the future of buy-to-let landlords, especially for those operating at some scale, on a professional level with a small to medium size portfolio of properties.
The economics still stack up
With average rents around 7 per cent of the value of the average rental property, and mortgage rates of 5.5 per cent, says Terrington, things don’t look all that great. But as he says, landlords don’t borrow on the full value of the property – the average Paragon customer borrows around 63 per cent of the value of the property – and therefore a 3.5 per cent return is easily achievable, even more when the loan to value comes down. There’s also a large cohort of landlords who own their properties outright, giving them a large cushion against the present economic difficulties, while enjoying the ability to pick and chose their tenants.
But the icing on the cake for buy-to-let property investment is the ability of rental income to maintain its value against inflation. With rents rising roughly in line with wages - around 30 per cent over the last five years - and on top of that landlords gain from the steady increase in the value of their rental properties, over time.