Landlords with several properties are bracing themselves for changes to mortgage rules that will make it far more difficult for them to finance their investments.
The move comes after a testing couple of years for landlords, who have been hit with stamp duty and tax rises, and a plethora of new regulations. At the same time, Labour leader Jeremy Corbyn promised last week to reintroduce rent controls if elected, after an absence of 30 years.
The new lending requirements set out by regulators mean that ‘portfolio’ landlords – those with four or more rental properties – will face far more stringent affordability checks in future. Landlords who seek finance for a single property will from this month have their entire portfolio assessed.
New rules: Landlords with four or more rental properties will face far more stringent affordability checks in future
David Hollingworth, of mortgage broker London and Country, explains: ‘Any landlord with four or more mortgaged buy-to-let properties will find that lenders will require details of all their properties, not just the one they are seeking to buy or refinance.
‘Landlords may find their choice of lender affected even if the new mortgage easily fits a lender’s standalone criteria.’
Exactly what information is required will vary, but it is likely to include the rental income and mortgage payments for each property, a business plan, cashflow forecasts, bank statements and tax returns.
At best, this will mean landlords will have to wade through a mountain of paperwork to be approved for a buy-to-let mortgage. At worst, some landlords could be turned down and end up ‘mortgage prisoners’ on expensive variable rates with their current lender.
Karen Bennett, managing director at Shawbrook Commercial Mortgages, says: ‘We have seen some lenders exit this market altogether, with others focusing on those landlords with three properties or fewer.’
Santander, for example, is restricting its lending to like-for-like remortgages for portfolio landlords. This means anyone looking to add to their portfolio or raise capital from existing properties will be turned down by the bank.
The changes come as appetite in the once vibrant buy-to-let sector is starting to diminish. The Council of Mortgage Lenders says the number of properties bought by landlords has almost halved in the past year.
Labour leader Jeremy Corbyn promised last week to reintroduce rent controls if elected
Buy-to-let landlords can no longer deduct the full cost of their mortgage interest from their rental income when they calculate the profit on which to pay tax.
From April this year they have been able to offset just 75 per cent of mortgage interest. From April 2020 landlords will only be able to claim tax relief at the basic rate of 20 per cent.
In simple terms this means that a higher rate taxpayer will have their monthly returns nearly wiped out if mortgage interest represents 75 per cent or more of rental income.
Landlords must now also pay a stamp duty surcharge of 3 percentage points on purchases.
Property owners also face big penalties for breaking strict new regulations on tenancies. These include unlimited fines if they fail to licence properties as required, such as those used for multiple occupation.
Landlords also face penalties of up to £3,000 if they let to tenants without a legal right to live in the UK. The ‘right to rent’ regulations put the onus on landlords to check tenants’ immigration status.
Looking ahead, new rules on energy efficiency mean that from April 2018 landlords must ensure all properties they let in England and Wales reach a rating of ‘E’ on a scale of A to G, where A is the most energy efficient.
Failure to comply could result in a fine of up to £5,000.
ACTION ON AGENTS
New rules for letting agents will also have a knock-on effect on landlords. The Draft Tenants’ Fees Bill, due to come into force this year, will ban agents from charging would-be tenants for obtaining references, carrying out credit checks, signing contracts, and protecting deposits. As a result, letting agents are likely to increase the fees they charge landlords.
… but demand is still rising
Despite the growing drawbacks of buy-to-let, it still offers major advantages over other forms of investing. First-time landlords currently enjoy low interest rates on loans and are benefiting from strong house price inflation.
Unlike stocks and shares, property can be bought with a deposit and a mortgage. Even if the FTSE 100 rises at the same rate as house prices, a buy-to-let landlord with a 20 per cent deposit will see five times the returns – if rental income covers the costs.
But unlike equities, buy-to-let is a hands-on investment. Landlords have to deal with both property maintenance and tenants’ issues.
Confidence in buy-to-let can be attributed in part to rising demand from tenants. Almost one in four households in Britain will be renting privately by the end of 2021, according to Knight Frank. The estate agent says soaring house prices and stagnant wages are putting home ownership out of the reach of many people.
Matt Sanders, from GoCompare Mortgages, says: ‘Our research reveals that half of all tenants rent because they cannot afford to buy their own home. It now looks like many have given up all hope of ever owning a home. For some, changes to buy-to-let regulations are likely to make renting more costly. In turn, that makes saving for a mortgage even harder.’