01525 552133
enquiry@ersproperty.co.uk

A third of landlords with just one buy-to-let are considering selling up – but bigger landlords want to invest more

  • Tax hit on buy-to-let is taking its toll on both new purchases and existing owners
  • Extra stamp duty dramatically increases cost of buying investment property
  • Changes to mortgage interest relief mean higher costs for existing landlords 

Two years on from sweeping tax reforms to buy-to-let, the Government’s aim of limiting small-scale amateur landlords appears to be closer to fruition.

Research conducted by Simple Landlords Insurance has found that a third of landlords with just one buy-to-let property are planning to sell and give up on buy-to-let.

Meanwhile, 38 per cent of landlords who own two or more properties say they are planning to buy at least one more in the coming year.

Tom Cooper, of Simple Landlords Insurance, said: ‘The research reveals it is the landlords positioned at the larger end of the market – or aspiring to get there – who are least fazed by tax changes.

‘They are also the best poised to take advantage of increasing tenant demand and bargain housing stock being sold off.’

It follows two years of change for buy-to-let landlords.

Former Chancellor George Osborne first announced a tax raid on landlords in 2015, stating the move was designed to support home ownership amid claims that landlords were scooping up properties and making it harder for hopeful first-time buyers to compete.

Intending to put a stop to this, the Government slapped a 3 per cent surcharge on stamp duty payable on new buy-to-let purchases from April 2016. This trebled the tax bill compared to residential property in some cases.

A further change arrived in April last year, as landlords began to lose their tax relief under a rule known as Section 24, which also forces them to pay tax on their rental income rather than just on their profit after mortgage costs.

Furthermore, the Bank of England also clamped down on mortgage lenders, forcing them to require landlords to earn a much higher ratio of rental income compared to their mortgage payments.

In October last year, further rules were brought in for landlords with four or more mortgaged properties to ensure their debt levels are not too high.

High house prices have also squeezed those looking to get into buy-to-let, while encouraging some smaller landlords fearing the headache of higher taxes to take profits and sell up.

House prices rose across the country, except in London, in the year to February, ONS figures showed this week.

Cooper added: ‘From Section 24 to Right to Rent, increased stamp duty, capital gains tax, regulation and licensing, you’d be forgiven for thinking it was all doom and gloom in the private rented sector.

‘But our evidence shows there are landlords adapting to the changes and emerging like phoenixes from the ashes.’

Some 38 per cent of the landlords with two or more properties said they plan to buy at least one more in the next year – dwarfing the 11 per cent of landlords with single properties who are planning to expand.

Meanwhile, 30 per cent of single property landlords plan to sell, compared with just 8 per cent of landlords with more than two properties.

The number of accidental landlords is also on the decline, falling from 18 per cent in 2016 to 15 per cent in 2017, widening the gulf between them and more professional investors.

Carl Agar, managing director of estate agent Big Red House, said: ‘Times change. Markets change. But property can still be a way to make money if you change too.

‘There’s a clear difference between the big players and the dabblers, the old school landlords and the new kids on the block.’

Yields from rental income are still healthy

Separate research released last month painted  a healthy picture for landlords. Yields rose in the second half of 2017 compared to the same period the year before in every region except London, which was the only region to see actual rental incomes fall.

The average gross rental yield on buy-to-let hit 5.2 per cent in the second half of 2017 according to BM Solutions – which is part of Lloyds Banking Group and one of the two biggest buy-to-let lenders in the country.

Landlords in the North of England are reaping the best rewards with yields touching 6.9 per cent at the end of last year.

Northern Ireland offers an average rental yield of 6.2 per cent, followed by the North West, Yorkshire and the Humber and Wales, all of which offer 6 per cent yields on average.

Agar said: ‘Your traditional landlord is seeing all of these new rules imposed and their returns drop. Meanwhile those new to the market are comparing those returns to what they’d get putting their money into a savings account – and it actually looks pretty good. They’re seeing opportunity, and building the rules, regulations and changes into their business model.

‘Personally, I’m looking forward to a more professional and more prosperous private rental sector, driven by a new breed of landlord investor.’

New focus for landlords

As well as being bigger and more professional, the emerging landlord is also investing differently, and diversifying their portfolio, according to Simple Landlord Insurance’s report.

The classic two up, two down home for families of working tenants is no longer where landlords poised for growth are investing.

Instead, higher yielding properties including holiday lets and flats are becoming more popular.

Landlords renting out houses in multiple occupation – properties let to more than one tenant on separate tenancy agreements – are also feeling optimistic, with 43 per cent in buying mode and just 4 per cent planning to shrink their portfolios, according to the research.

Seven important law changes landlords need to know about

Minimum Energy Efficiency Standards (MEES)

As the 1st April deadline quickly approaches, it is no surprise that our Landlord Advice Team is taking calls from members relating to energy efficiency,

Any properties that are rented out in the private rented sector will need a minimum energy performance rating of E on an EPC certificate, as of 1st April. These new rules cover all new lets and renewals and will be extended to all existing tenancies on 1st April 2020. Read this usefulguide on Minimum Energy Efficiency Standards here.

HMO room size regulations

Research from RLA PEARL has found that 16% of landlords rent to people in HMOs, so this law change, set to be introduced in October, will impact a huge number of landlords.

As of October this year, a national minimum bedroom size will be introduced for all licensed HMOs, and councils will be required to stipulate how many people can sleep in each room.

Councils will be able to apply national minimum standards or set even tougher local requirements. You can read about the specific changes here 

GDPR

General Data Protection Regulations are due to come in this May, replacing the Data Protection Act. The changes that are due to come in and what in practice they mean for landlords were recently covered in our Call of the Week.

Extension of mandatory HMO licensing

The Government has confirmed that the extension of mandatory HMO licensing is due to come into force from 1st October 2018.

The regulations bring purpose-built flats (where there are up to two flats in the block) into the scope of mandatory licensing. They also remove the three storey rule – at present mandatory licensing applies to HMOs of at least three storeys and five occupants comprising of two or more family units – bringing almost 200,000 additional properties under mandatory licensing rules.

Banning Orders

While the majority of landlords are excellent and law abiding, it is a sad reality that some are criminal landlords who give decent landlords a bad name.

The new banning orders that will be introduced on 6th April hope to tackle these criminal landlords and agents. Introduced under the Housing and Planning Act 2016, these banning orders mean that an individual who has been convicted of specified offences can be barred from renting out properties for a minimum of one year.

The RLA published its submission to the consultation held by the Government on Banning Orders, which can be read here.

Extension of Section 21

Another legislative change which landlords should be aware of in October is the extension of Section 21. The implementation of the Deregulation Act saw several changes that were made to Section 21 tenancies, which applied to all tenancies or renewals that started on or after October 1st 2015.

However, the changes will now impact all tenancies, including those that were established BEFORE 1st October 2015.

In practice, this means that all landlords will legally be required to supply their tenants with the ‘prescribed documents’ before the start of the tenancy.

These are: tenancy deposit information, a copy of the property’s EPC certificate, valid gas safety certificate and a copy of the Government’s latest ‘How to Rent’ guide.

Gas Safety

Landlords are set to have greater flexibility around dates when it comes to the rules surrounding annual gas safety checks.

Similar to rules surrounding car MOTs, landlords will be able to make compulsory checks any time in the two months leading up to the renewal date, while still retaining the existing date for the following year.

In practice this means that, were your check due on May 31 for example, the check could be carried out any time in April or May, and you would still retain the May 31 renewal date for the following year. 

Are you ready for GDPR?

Major changes to data protection legislation take effect on 25th May. All landlords will be affected as they handle personal data. Here’s what you need to know to make sure you are compliant.

Data protection legislation has been around for a long time, but these new changes mean you must now pay a lot more attention to your responsibilities or you could face fines or claims by tenants for damages.

What is GDPR?

The new legislation is set out in the General Data Protection Regulation (GDPR).

It is based on existing rules, but there are a number of important changes which will affect landlords:

  • A new right for the data subject to be given information about how their data is dealt with.
  • Deadlines are set for the timing of providing this information.
  • Where you rely on consent as the gateway for handling data there are more stringent requirements about obtaining consent.
  • The need to record how you handle data and decisions you make around this.
  • Greater emphasis on ensuring that data is held securely.
  • Stricter enforcement of time limits for holding data.
  • New rights for tenants giving them greater control over what happens to their personal data.
  • Obligations to notify the Information Commissioner’s Office and in some cases the individual affected if there is a personal data breach.

There are some similarities with the existing data protection legislation but there are a number of important differences.

And while the new data protection requirements come from Brussels, they will still remain in force after we leave the EU.

What is personal data?

All kinds of information about an individual are considered personal data, e.g. their name, date of birth, national insurance number, contact addresses and car registration number.

Email addresses and IP addresses are personal data. The person who this related to – (for example your tenant) is called the data subject.

Personal data is mainly linked with electronic processing, e.g. computers, emails and mobile phones and text messages.

This is so even if the information was originally collected in handwriting. GDPR also applies even if you have an organised manual filing system.

Can I legally handle data?

It is important to understand that before you can handle or ‘process’ personal data there must be a legal “gateway” to do so.

The main gateways relevant to private landlords are:

  • You hold the data subject’s consent which must relate to use for one or more specific purposes. It is wrong to think that handling personal data always requires consent. In fact, you are far better relying on other gateways.
  • Data handling is necessary to perform a contract to which both you and the data subject are parties. This will cover many activities a landlord undertakes.
  • To comply with a legal obligation (other than a contractual obligation). This would for example cover data handling around gas safety checks or protecting deposits.
  • Where there is a legitimate interest in handling the data. These can be your own legitimate interests or those of someone else. This gateway requires a balance to be struck between this legitimate interest and the data subject’s rights so that a brief legitimate interests assessment must be carried out and recorded.

Importantly, not only must you have a gateway to handle data but in all cases (even where you have consent) you must comply with the data protection principles.

Data protection principles

The principles state that personal data must:

  • be handled lawfully, fairly and transparently. This means information must be used in a way people would reasonably expect.
  • be collected for specified explicit and legitimate purposes.
  • be adequate, relevant and limited to what is necessary.
  • be accurate and up to date.
  • be stored on a time limited basis.
  • be handled in a way which ensures appropriate security.
Deadline for action

The deadline date for acting is 25th May 2018 when GDPR comes into force.

The new requirements apply to both existing and new tenancies which start after that date.

Each new tenant or prospective tenant must be given a privacy notice. Sample privacy notices for both England and Wales will be uploaded to the RLA site in the coming weeks.

What do I need to do to be compliant?

The first thing that you need to do is prepare and issue a new privacy statement. To help prepare this privacy statement you will need to review what personal data you hold, why you hold it, the legal gateway for doing so and how you use this data, as well as how long you keep it.

You need to put in place a system to make sure that you provide your tenants and anyone who wants to rent from you with this privacy notice.

If you rely on consent as the legal gateway to handle data you need to familiarise yourself with the new rules around obtaining consents which are much more stringent.

You will need to document the process which you use to obtain consent.

If you currently rely on consents it is safer to start all over again to refresh existing consents where they are needed.

Rather than rely on consents you may well want to look at whether there is an alternative legal gateway available, so that consent is not needed at all.

You need to put in place a process for recording the decisions you make about handling personal data.

You need to review your security arrangements for personal data which you hold at the same time.

You need to make sure that access is restricted to those who need to handle the data, it is password protected and that computers and mobile devices are kept secure, as a minimum.

 

Warnings of likely rent hikes and mass exodus of small private landlords as tax changes bite

There are new warnings, including from Savills, that the buy-to-let market is looking increasingly bleak with landlords deterred from entering the sector or considering quitting it altogether.

According to one study, as many as three-quarters of landlords could quit, including 10% who say they are definitely selling up, while four in ten say they will be forced to put up rents.

The majority of landlords thinking of getting out of the sector have just one property and say they will sell if they are making a loss, breaking even, or even just not making enough profit to make it worthwhile.

They blame continued financial pressure and costs created by a steady drip of new legislation, specifically citing the impending tenant fees ban, and the loss of tax relief on mortgage costs which is currently being phased in.

The new survey of 1,000 landlords has indicated that 41% will be forced to increase rents – but has also revealed that a majority will not hike rents because they believe tenants are already at the edge of  affordability.

The survey was conducted by 3Gem for online letting agent MakeUrMove.

Managing director Alexandra Morris said: “The result of the rising costs associated with the changing legislative and regulatory environment will either be increased rents or landlords having to sell their properties.

“The worst-case scenario will be a housing market crash if landlords default on their mortgage payments or decide to cut their losses. The Government is currently sleep-walking into this crisis. The alarm bells should be ringing. The Government needs to act now to ensure it remains financially viable for landlords to meet their financial obligations.

“While we wholly believe the industry needs to be regulated, the taxation changes could have a huge impact on smaller landlords.

“They might struggle in the new environment, having potentially devastating effects on the housing market. This is particularly concerning when private landlords provide a vital role as the backbone of the UK housing market.

“The Government is supposedly bringing in this legislation to protect tenants, but the unintended consequence will likely be landlords having to increase rents, especially if they are forced into debt on their rental property. And this is the best-case scenario. In reality it could be much worse.”

Savills has also expressed concern, saying that the combination of prospective interest rate rises and the reducing ability to offset mortgage interest costs against tax is proving a double whammy for landlords.

Lucian Cook of Savills said: “It’s why we’re beginning to see signs of some people exiting the sector or reducing their porfolios.”

Landlord associations have repeatedly warned of a likely exodus of small private landlords, principally because of the loss of ability to offset mortgage interest costs against tax. Anecdotally, agents have reported in EYE posts  being instructed to sell properties rather than re-market them to let.

From next month, landlords will be able to offset only 50% of their mortgage interest costs against tax, rather than the 75% they are currently able to offset. This figure will continue to drop until 2020 when the ability to claim any tax relief will be scrapped and replaced by a tax credit worth 20% of mortgage interest.

New PRA Buy-To-Let Regulation

Buy to Let Mortgage Lenders (that are regulated by the PRA) from 1 January 2017 will have to implement restrictions on lending criteria.

These changes include stricter affordability tests including Interest Cover Ratio including the impact of recent Tax Changes and a stress test on interest rate rises.

Other restrictions such as regulatory burdens on portfolio landlords will be implemented by 30 September 2017.

The regulatory changes come into effect for new Purchases or Capital Raising – remortgage buy to let properties remain unaffected.

Other loans including Holiday lets, bridging loans, property investment lending and corporate lending are exempt from the underwriting standards.

Affordability Testing

The PRA has required lenders implement into their criteria an Interest Coverage Ratio Test (and/or) a personal income affordability test.

The lenders in such affordability test must take into account any tax liability.

While the PRA outlines minimum requirements, it does not set a minimum Interest Coverage Ratio threshold, this move bank lending into a justification of their procedures under the rules.

Except for the future interest rate test, in which the PRA prescribes that a lender must have a minimum test of 5.5% during the first five years of a buy-to-let mortgage.

The affordability test must include a set of variables including income affordability test, all costs associated with renting a property, tax liability, income net of tax, national insurance payments, credit commitments, committed expenditure, essential expenditure and living costs. Your personal affordability will hold more weight in affordability if you require on personal income to support the rent.

Lenders are now allowed to base affordability assessment on the equity in the property used as security. This is a viability of business test and not lenders security.

The PRA does not expect it to drop further than 125% and a minimum rate of 5.5%.

The formula to find Maximum Loan:
theRent (divide) theMultiplier (divide) theRate (multiply) 12 months

With expected minimums:
theRent (divide) 125% (divide) 5.5% (multiply) 12 months

So with £500 per month rent the maximum loan, on the VERY MINIMUM requirements is: £87272

Many lenders are currently above the current minimum (and expected minimums).

Portfolio Landlords

The PRA is to require from Lenders a special underwriting process for Landlords with four or more mortgaged BTL properties.

This is because the PRA has found that arrears rates increase as portfolio size increases.

The PRA does not prescribe a requirement but outlines lenders should take into consideration a Landlords Experience and record their full portfolio, rent and outstanding mortgages. In addition to assets and liabilities and tax liabilities.

Lenders should also take into consideration the merits of any new lending in accordance with the landlords business plan.

In addition to historical and future expected cash flows.

PRA not concerned with tax changes and this combining effect.
PRS not concerned that some lenders wont have to implement this change, as they have asked for more powers from govt.

In Summary

When it comes to affordability requirements many lenders already have such minimum requirements above and beyond current requirements. Many lenders have increased these stress test recently in anticipation of the PRA requirements or as a consequence of the Tax Changes. Its not much of a change but can effect total borrowing.

Portfolio Landlords may be in for a harder process on the next purchase after September 2017. The specialist process will require a lot more information and may include as the PRA suggests Cash Flow Forecasts, Business Plan and Portfolio Spreadsheets. Nothing new to anyone undertaking business loans.

Section 24

Section 24 of the Finance (no. 2) Act 2015 might mean that over half of UK landlords will be pushed into a higher rate of tax despite their income not having increased, and some might end up renting at a loss.

Until now, landlords have been able to deduct the full cost of their mortgage interest payments on their rental properties before they pay tax. Starting April 2017, mortgage, loan and overdraft interest costs will not be considered in calculating taxable rental income.

The changes will be phased in gradually over 4 years, starting from 5th April 2017. By 2020, 100% of finance costs will be restricted to 20% tax relief only.

The change will be introduced gradually over the next 4 years and could see many landlords with interest costs affected and end up paying more tax on their property income. In addition, landlords could be pushed into higher tax brackets which in turn could affect child tax credit assessments and student loan repayments, leaving landlords even more out of pocket.

What landlords need to know about September 2017’s buy-to-let changes

New buy-to-let lending rules will be introduced from September, so what should landlords keep in mind ahead of the crackdown?

George Osborne may no longer be in situ, but planned landlord rulings are still set to take effect from September 2017, with an ever-tighter focus on buy-to-let mortgage and lending requirements.

In a bid to reduce irresponsible lending in the sector, the Bank of England (specifically the Prudential Regulation Authority) will place new, tougher requirements on lenders from September, including the interest rates-dependent ‘stress test’ on new mortgage applications.

Lenders will also need to review a landlord’s entire property portfolio when making a decision on their single property application, which will hit hard on multi-property landlords, especially if one or two of your properties aren’t turning as much of a profit.

Lenders will be looking at your whole buy-to-let portfolio

From September, when making an application for a buy-to-let-mortgage on a new rental property, the lender will need to to look at your entire property portfolio, meaning that one bad, non-profitable, apple could rot the whole barrel.

“The rules say the whole portfolio must be viable,” Ray Boulger, from broker John Charcol, has told the Telegraph. He goes on, “Let’s say you have ten properties and eight are generating rental income in excess of mortgage payments and the other two are not, but the shortfall is covered by the other eight. Is that going to be acceptable? For some lenders it will be, for others it might not be.”

The new stress test on buy-to-let mortgages

2017 has seen new rules regarding stress tests on buy-to-let mortgages, causing further issues for landlords who’re looking to expand or find new mortgages from this autumn. The stress test forces lenders to check a borrower can afford repayments, if interest rates were to hit 5.5%.

They may also ask to see a business plan. And it’s these new strips of red tape combined that means lenders may retreat from selling buy-to-let mortgages, putting UK landlords in a potentially impossible situation.

What’s the advice for buy-to-let investors?

Brokers are advising landlords to get their mortgages sorted and spring-cleaned over the summer, ready for the new rules to hit in September. If you’re operating through a limited company, or plan to be, buy-to-let mortgage deals have doubled in the last year, so shopping around now could be helpful. Limited companies aren’t right for everyone though, and research is critical.

What’s behind this new buy-to-let crackdown?

The changes are all part of former chancellor George Osborne’s focus on buy-to-let landlords, designed to turn people off investing in the rental property sector.

This, in theory, is hoped to give first-time buyers a better chance of getting on the property ladder, but experts are warning of a backfire. The prediction is that landlords will simply raise rents to make up the difference, and so the cycle continues.

So is buy-to-let worth it? With new tax rules around additional Stamp Duty and lower tax relief, it’s already a hot point of debate. The Council of Mortgage Lenders (CML) has already hit property headlines with figures in June, reporting buy-to-let purchases averaging 6,000 a month this year, half of where they stood for the same period in 2016.

Average Rental Rate Across England & Wales Has Risen by 3.1%

There were plenty of predictions and forecasts on how 2016’s introduction of higher stamp duty and 2017’s changes to tax relief for landlords, would change the buy to let market and now it appears we may be seeing the effects.

The latest Buy to Let Index has revealed that rental rates across England and Wales have risen over the past 12 months, finding an average monthly increase of 0.22% and a 3.1% increase year on year, taking the current average price of rent to £874.

According to the index, 9 out of 10 regions across England and Wales have seen a rise in rental prices, with the South West being the only region that saw rental rates fall over the last 12 months, dropping by 2.2% to £667 per month on average.

The highest growth in rents by region was seen in Wales, as data from the index revealed a 4.3% jump over 12 months, resulting in an average of £595 per month. There was also considerable growth seen in the South East of England, showing the second highest rise of 3.6% to reach an average of £884 per month.

In regards to the highest rental rates, London is expectedly on top, as the average rent in this region currently sits at £1,283, however, the capital only saw a 1.2% rise in rental rates in the last year.

In terms of yields, it appears that landlords in the north of England have seen the highest return. The index showed landlords in the North East and the North West received an average yield of 5.2% and 5% respectively.

Why property has been the best investment of the last 10 years

Since the financial crisis in 2008 the economy seems to have been in a constant state of uncertainty, leaving many questioning where exactly is the best place to invest their money.

There are plenty of options from the stock market to savings accounts, but what may surprise some is that findings from a recent study have shown property to bring the biggest return on investment over the last 10 years.

A recent study from estate agents Romans and Leaders has shown property to be the best investment option by some margin, by carrying out a comparison between the four most popular investment options, which are savings accounts, FTSE 100, property and gold.

This research looked into how much return you would see from an investment of £50,000 in 2006 into each of these investment options.

The results showed property at the top of the table by some distance. An investment in FTSE 100 would’ve seen a profit of £3,000, a savings account would bring in roughly £15,000 of profit and an investment in gold would fetch an extra £50,000 across the 10 years. While £50,000 is still a great return, property showed to be the clear leader with approximately £90,000 higher return than gold and an overall profit of £140,000 based on annual house price increases.

Managing Director at Leaders, Allison Thompson spoke on the results explaining why property comes out on top, she said “Despite many changes over the last ten years to the housing market and wider economy, buy-to-let is still the clear winner. As well as the most rewarding, it is also the safest of all the investment options over the long-term. We have seen historically that, although cyclical, house prices always rise in the long run. With the acute shortage of housing across the UK, this is only likely to continue.”

Thompson also suggests that while many are looking for the right time to jump into property investment, short term fluctuations in the market shouldn’t deter potential investors: “Understandably, a lot of investors want to get the timing right when purchasing a property, but inevitably if you’re in it for the medium to long term, just learn to accept these fluctuations as any short term gains or losses. Second guessing and predicting the market will more than likely pale into insignificance in comparison to your overall return after ten years.”

Project 6

EastProject 6 is a two bedroom terraced house in Leighton Buzzard.

This property will return just over 5% on the original investment.

The property went on RightMove on 17th November 2016 at around 3pm, and by 5pm it had 20 enquiries.  Within 24 hours it had another 15.

Obviously the demand for rental properties in Leighton Buzzard far outstrips supply.  This should give confidence to all our current and prospective investors that property in Leighton Buzzard is a very safe investment.

 

 

 

Here is a short video of the property that was taken after the property had been professionally cleaned and all maintenance issues fixed.

 

Privacy Preference Center

Close your account?

Your account will be closed and all data will be permanently deleted and cannot be recovered. Are you sure?