The amount of new investment by small-scale landlords using buy-to-let (BTL) mortgages has fallen drastically in the past two years, that’s according to the Intermediary Mortgage Lenders Association (IMLA).
New investment in BTL has fallen by around £20bn in two years, representing 80% of the small-scale BTL mortgage market. This is due to a combination of higher taxes, tighter tax and mortgage rules, and a swathe of other regulations bearing down on private landlords.
In contrast to this, the country’s largest listed residential landlord has followed through on its stated intentions to enter the emerging build-to-rent sector in a big way. Grainger announced in January 2016 that it was to invest £850 million in the private rented sector (PRS).
With the prospect of ever growing demand for rented accommodation from young people, those struggling to afford a deposit, and the growth of an older generation renting, plus a rapidly growing population, confidence in the BTL market is still very strong.
In the last two years reforms by government have had an intentional dampening effect on the traditional BTL market. This hits those landlords most who were looking to expand an existing portfolio. Stamp duty increases, the phased removal of mortgage interest relief, and more recently the Prudential Regulation Authority’s (Bank of England) stricter lending criteria have all taken their toll.
According to the latest available figures, there are currently 4.5 million people living in the private-rented sector. IMLA warns that if demand continues to rise at its current rate the government’s crackdown on BTL landlords will force average rents up.
Aaron Strutt of mortgage brokers Trinity Specialist Finance told The FT Newspaper that they had seen a falling off of interest from BTL investors, and whereas around 40% of their business was BTL, prior to the changes, this is now nearer 20%.
“We don’t get as many emails as we did asking about buy-to-let,” he had said. “We get a lot more interest from first-time buyers.”
However, it seems as the market has slowed down, lenders have cut their rates on BTL mortgages, with Natwest reducing some fixed BTL mortgage rates by 0.6pc, while other lenders are now offering BTL mortgages to those landlords operating within a limited company.
Before the changes for small-scale landlords, most lenders were looking for rental income to cover 125% of the mortgage payment, assuming a rental yield of 5%, whereas now these figures are more like 145% and 5.5% respectively, on a typical loan-to-value (LTV) of 60%.
For BTL landlords with one, two of even three properties the impact of the changes is not so great, but for those with finance on four or more properties (now classed as portfolio landlords) the refinancing scrutiny is much greater: lenders will expect their whole portfolio to satisfy the new criteria when taking out a new loan or re-mortgage.
However, for those landlords holding their properties in a limited company, or for basic rate taxpayers, there is a modicum of relief as they are only required to cover 125pc of their mortgage payments with rental income.
Basic-rate taxpayers and those without mortgages are hardly affected by the changes. Operating through a limited company structure can be attractive to some as the BTL stamp duty surcharge and the changes to tax relief on mortgage interest does not apply, though anyone considering incorporation should seek advice from qualified tax accountant.
Another strategy to reduce uncertainty, especially in an environment of potential interest rates rises, is to consider longer term fixes. Some landlords are now looking at five year fixed deals, while others are looking at reducing borrowings by selling off some properties, or for example, selling one property in a portfolio of four, meaning they are no longer classed as a “portfolio landlord” for mortgage purposes.