Andrew Turner is chief executive of Commercial Trust
Will the New Year bring renewed optimism for Britain’s beleaguered landlords?
Landlords faced a wave of change during 2017, but despite a number of high and low points, buy-to-let continued to deliver competitive returns. So what does 2018 have in store?
PRA rules continue to settle in
2017 brought about important changes for buy-to-let as a result of two rounds of Prudential Regulation Authority (PRA) rule implementations.
Stricter affordability rules have resulted in some investors being unable to borrow the amounts they need, while landlords owning four or more properties are subject to more rigorous underwriting procedures.
This looks set to continue into 2018, which means seeking the very best advice is even more imperative than before. Be sure that, however you identify a mortgage, you have looked in detail at all the options.
Don’t just go to your own bank, only look at a lender you have used before, or compare only a couple of lenders. It is possible that in doing so, you could pay more than necessary on monthly repayments.
If you own four or more properties, be prepared to provide more details about your portfolio and finances than you may have done in the past. If you are in a hurry to complete, notify your broker or lender and be clear whether your deadline can be met.
Top-slicing as an option
Post-PRA changes, an increasing number of lenders are using a dynamic called ‘top-slicing’ to assess the affordability of new lending.
With top slicing, lenders take into account a borrower’s demonstrable, regular surplus income as well as their rental income, to calculate mortgage affordability. Now that these calculations are stricter, this may well help to get a deal over the line.
This can be particularly helpful where a borrower has a generous disposable income, but low rental yield from their property.
A growing need for specialist brokers
With over 40 lenders in the marketplace, all having taken a slightly different approach to the PRA changes (on top of the already widening spectrum of products and criteria they offer) it takes a specialist with significant resources to keep track of the wealth of products available.
2018 will begin with plenty of borrowers (particularly those owning four or more properties) still unclear on which lenders to turn to in the post-PRA world.
The New Year represents an opportunity for specialist brokers such as ourselves to shine.
Changes in the letting industry
At the time of writing, the government is pressing on with its intention to ban letting agent fees.
The draft Tenant Fees Bill has received support from all sides of the political spectrum and is designed to not only reduce tenants costs by banning letting agent fees, but to improve transparency and prevent agents from ‘double-charging’ landlords and tenants for the same services.
However, a number of points are still being debated, including putting a limit of six weeks’ rent on security deposits and one week’s rent on holding deposits, while the process for the return of the holding deposit to the tenant remains undefined at the time of writing.
Landlords will be keen to monitor news on this bill, particularly given the widespread concerns that letting agents could simply pass on this loss of revenue stream to landlords, through higher charges, or reduce the work that they undertake when managing rental properties.
Longer tenancy agreements
Back in the autumn of 2017, Sajid Javid, Communities Secretary, announced that the government supported the concept of longer tenancy agreements.
This point was further endorsed in Philip Hammond’s Autumn Budget in November, where it was announced that the government was investigating ways to incentivise landlords to offer 12 months tenancies, to tenants who wanted them.
Longer tenancy agreements may be a double-edged sword for landlords.
On the one hand, longer tenancies offer greater security as they reduce the risk of periods when the property is unoccupied and not generating rent during the course of the year. Such times can be costly and it can be expensive to go through the process of finding the next tenant.
However, if either party is unhappy (particularly at the beginning of a relationship with a new tenant), a 12-month tenancy agreement can be less attractive.
Furthermore, if the landlord’s financial situation changes (for example if mortgage rates increased and the monthly payments went up), it may be contractually tricky to increase rent within the time parameters set by a longer tenancy agreement.
Do bear in mind that buy-to-let lenders sometimes have rules around the length of tenancy landlords can offer, so if you are considering offering a long tenancy period, check that it does not conflict with your mortgage terms.
Universal credit changes
Universal Credit is set for change in 2018, with the proposed revisions serving up some potentially welcome news for landlords.
Just after the Autumn Budget it was announced that, where tenants prefer their rent to be paid direct to their landlord, this will still be possible.
From February, claimants will become eligible for Universal Credit on the day they apply, rather than facing a seven-day delay, while from April 2018, housing benefit will be paid for two weeks after a claim for Universal Credit.
Further interest rate changes?
Months of speculation came to a head in November 2017, when the Bank of England’s (BOE) Monetary Policy Committee (MPC) increased the base rate by 0.25%, to 0.50% – the first such rise in a decade.
This proved a catalyst for a number of lenders to increase mortgage interest rates and suddenly a number of borrowers found that they had to spend extra money on their monthly mortgage repayments.
The BOE had already indicated that the rate of inflation (which reached a high of 3% in September) was a big contributory factor in any decision to increase the base rate, with the MPC suggesting inflation could continue to rise during 2018.
Speaking to the BBC’s Today programme, Ben Broadbent, deputy governor of the Bank of England hinted further base hikes are a distinct possibility in 2018: “We’ve said, given all the things we assume in our forecast, many of which will be misses – there are always unknown things and unpredictable things happening – but given our outlook currently, we anticipate we will need maybe a couple more rate rises, to get inflation back on track, while at the same time supporting the economy.”
Getting the maths right in 2018
Tax changes to the buy-to-let industry continue to affect landlords and 2018 will see more pressure put on finances, as the next phase of reduction in tax relief comes into play.
Mortgage interest tax relief is gradually reducing to 20% by 2020, in April this means a drop of 25% to 50% relief for the tax year 2018/19.
Be prepared. Seek professional tax advice if you are unclear on your position; call us if you need to find a harder working buy-to-let mortgage solution.
The New Year is often a time for reflection – and there has been plenty to look back on and contemplate for buy-to-let landlords, but it is equally important to look ahead.
In the wake of so much change in 2017, some landlords have decided to incorporate their property businesses, while others have looked to remortgage. It makes sense to speak with a specialist broker before making any major changes (and a tax specialist), to be clear on all available options.
Now is a good time for landlords to take stock of their businesses and to establish what they want to achieve in 2018. But it is also important to be mindful of the potential financial impact of forthcoming changes and to plan ahead as much as possible.
The changes to the buy-to-let industry have been significant, but landlords have a tendency to adapt and have enjoyed healthy returns by doing their maths right.
As the industry enters 2018, the high demand for rental property is good cause for optimism.