Doubling in size since 2002, the Private Rented Sector (PRS) is now the second largest tenure in England. Today, some 5.34 million (20%) of all households live in let accommodation – many of them owned by buy-to-let Landlords.
A Brief History of the Buy-to-Let Sector
Many ascribe this massive growth to the introduction of the buy-to-let mortgage in 1996. Particularly in the early 2000s, secured lending against rental Property reached massive highs. Prior to the credit crisis it was even possible to finance close to 100% of a property’s value as speculative lenders became willing to accept very little collateral. Somewhat predictably, the property crash that followed the “crunch” led to a sharp decline in buy-to-let borrowing between 2009 and 2010.
However, the market recovered quicker than many were expecting. From 2010 to 2016, for example, new buy-to-let mortgage levels rose by almost 200%. This was arguably fuelled by the low interest rate borrowing environment offered by lenders in the space (even though deposit requirements have generally been higher).
Who are the Nation’s Landlords in 2017/18?
Today, there is no typical “landlord profile”. The industry consists of professional investors, developers and business owners right through to civil servants, nurses and teachers. Inheriting a property and then renting it out or holding on to previously owner-occupied homes to let is also increasingly common. Indeed, according to YouGov data, most (89%) of private rented sector landlords are “amateur” or “accidental”.
Only 1% landlords own more than 10 properties. According to Rightmove, 15% landlords are tenants themselves and many are over the age of 55. On this latter point, contrary to widely held belief, buy-to-let rarely generates solid income for many years and is increasingly used as a pension provision substitute – particularly with savings rates being so low.
Top Down Controls on the Buy-to-Let Sector
Nonetheless, despite the logical intentions of many people to adequately prepare for their future, in 2015 the government began implementing a series of measures aimed at decelerating the growth of buy-to-let.
Section 24 of the Finance (No. 2) Act 2015, perhaps the most punitive proposal to ever hit the industry, looks firmly set to limit the amount of tax deductible mortgage interest by 2021. This likely to have a major impact on income streams across the country – particularly amongst landlords who have borrowed heavily against their personally-owned properties. Readers may be interested in our interview with Simon Misiewicz of property accountants Optimise on the topic:
- How Landlords Can Be More Tax Efficient Post Section 24 (Part 1)
- How Landlords Can Be More Tax Efficient Post Section 24 (Part 2)
Initiated in January 2017, the Prudential Regulation Authority (PRA) criteria is also likely to have an adverse effect on market dynamics – although debatably less so than Section 24. Aimed at preventing the “loosening in current industry standards for buy-to-let underwriting”, the stricter lending criteria ultimately means that investor landlords will need to commit additional sums of equity to secure financing. As at September 2017, portfolio landlords (i.e. those with 4 or more properties) in search of finance will also have to produce extra documentation including an asset / liability profile, a business plan and current portfolio schedule as well as cashflow forecasts.
Throwing into the mix the Stamp Duty Surcharge initiated in April 2016 plus other compliance and regulatory reforms, it comes as no surprise that an increasing number of landlords are considering exiting the sector or entirely restructuring their businesses.
Where Next for the Buy-to-Let Sector?
Most industry professionals have little objection to the PRA controls. The Stamp Duty surcharge was also understandable to a certain degree. However, the Section 24 issue is certainly one that continues to leave many confounded. Yet with government and policy makers continue to ignore criticisms by The Institute for Fiscal Studies, The Institute of Chartered Accountants, a broad spectrum of MPs and many other industry professionals, the chances of a change of direction seem slim at the time of writing.
I am a Landlord – What Should I Do Now?
Firstly, as with most things, the impacts of these changes will take some time to filter through into the market. Factors such as the SDLT surcharge and PRA rules will only affect new acquisitions and non “like-for-like” remortgages (so if you are looking to only swap lender without releasing equity, you will not be affected).
With regards to Section 24, assuming you do not hold any properties in a Limited company (Special Purpose Vehicle), the coming years could be more complex. Irrespective of whether you own 1 or 2 properties or a larger portfolio, the general advice to landlords is to get a firm grip on your specific financial position in good timing and make the right preparations. Your first port of call should be a qualified accountant (with suitable buy-to-let property experience) who will be able to assess your tax position as the tapered effects of the legislation intensify. Particularly if you are lower tax payer, there may not be any extra liability (although there are several crucial factors to consider here).
Despite the scaremongering, what’s happening across the sector should also not be viewed too negatively. The demand for rental properties shows little sign of waning and, for serious investors, there are opportunities to capitalise on this new operational environment. Taking a more “corporatised” approach to buy-to-let acquisition will almost certainly be the chosen strategy for those looking to expand their holdings in the coming years.
The Buy-to-Let Property Investor’s eBook and Comprehensive Financial Calculator
The Buy-to-Let Property Investor’s eBook and Comprehensive Financial Calculator are aimed at providing investors with some of the tools to better navigate through the ongoing changes occurring across the sector.
The eBook has been split into 10 chapters and starts by going into further depth into the Prudential Regulation Authority (PRA) criteria and Section 24, before listing a broad array of modern “macro”, “micro” and rental market research tools. We also cover buy-to-let refurbishment and acquiring properties using a Limited company (Special Purpose Vehicles) structure amongst other topics. The buy-to-let financial calculator enables investors to adopt a more sophisticated approach to deal analysis.
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