Is Buy-to-Let on the way out?
Landlords of UK buy-to-let property have responded to the government squeezing their returns by selling assets, triggering a bumper 18.6 per cent rise in capital gains tax payments in 2018/19, but is the dream over for landlords?
Over the last three years it feels like more column inches in the mortgage world have been devoted to the ‘death of the buy-to-let market’ (BTL) than any other topic. This was mainly due to two reasons.
First, the UK’s obsession with owning property meant it was already a favourite dinner table or pub topic thanks to years of price rises. Second, the triple whammy of additional stamp duty, affordability restrictions and now the income tax changes have had a definite affect. So let’s look at what actually happened.
Whilst property prices were rising there was a feeling that anyone could make some money. There were a lot of people who had some cash from various sources including pension schemes, an inheritance, or a further advance on their main residence and decided that being a landlord was a route to further wealth. They spent years outbidding first time buyers for standard two bedroom flats/houses all over the UK. This outbidding of first time buyers was being noticed and frowned upon as it helped to create ‘generation rent.’ The government saw an opportunity to raise revenue and curb the landlord purchases and introduced additional stamp duty (3% of the full purchase price) and caused the biggest spike in buy-to-let property purchase seen in a generation (January to March 2016).
Following that change, the Bank of England, who had been watching the UK property market for a few years, felt that the ease with which landlords could obtain mortgages without necessarily being able to afford them needed tightening. This was especially true for landlords who suffered tenancy voids causing a lack of rental income. Through the Prudential Regulatory Authority lenders had to increase the rental incomes required to get the same size loans as before. Within a year, landlords buying property had to stump up thousands extra in stamp duty just to buy a property and the rent had to be higher to get the loan size they needed. BTL purchases dropped in number very quickly.
The final ‘attack’ on landlords is currently starting to bite. The government decided to raise some revenue and curb landlords by phasing out the automatic right to offset all the interest payments on a BTL mortgage against the rent before calculating net profit for taxation purposes. This phasing has recently begun and landlords will be feeling the effect of higher tax bills this year and next. From 2015 to 2017 the BTL business John Charcol helped with fell from roughly 40% of our mortgage submission to about 25% – a large drop in such a small space of time.
So what are landlords doing about it? Are they still buying? Should they be selling?
These are the questions being asked up and down the country. Landlords are generally holding on to see what happens – especially if the properties are in the South East where prices are often currently falling or staying level at best. No-one wants to make a loss on sale so holding on whilst not making a loss can make some sense. But buying in the same region is nowhere near as financially viable as it was since rents have not increased as much as actual prices and with the new affordability calculations BTL landlords may struggle get the loan sizes required.
The net result is that the so-called dinner table landlords (or occasional/accidental landlords) have mostly withdrawn, leaving determined or professional landlords to fly the flag.
But if they cannot buy in the property powerhouse of the South East what have they been doing? Answer – many are going for holiday lets, student lets and HMOs (House of Multiple Occupation) often in university towns. Not only are those properties often outside London and therefore cheaper but the rents aren’t much lower than much of the South East as university towns will always need student accommodation.
If they are not buying should they be selling? If prices are falling but rental income is still flowing there is little incentive to sell. So many are holding tight. Unfortunately for many landlords they often cannot remortgage to raise capital or even get a further advance due to the new affordability calculations. So what are they doing?
Many are talking to their accountants about using a limited company to buy, sell, and rent property. Limited companies have some fundamental differences that can make them advantageous to a landlord. They pay less tax than an individual and they can currently still offset mortgage interest against rental income. Advantageous though that is, the advice to many is to simply buy new properties using a limited company but not transfer existing properties into the limited company. That is a decision that only a qualified tax specialist can help with but it is often down to the stamp duty costs involved. Another advantage of using a limited company is that you can potentially look to pass on your portfolio to your children by granting them shares in the company in the future should you want to.
Is this the end of the BTL market? Definitely not. The occasional landlords may have decided that this is not for them, but the serious investors are still there.
The numbers of limited company BTL mortgage applications are rising and lenders are offering more products for this sector than ever before as a result. Landlords are sitting tight and often using brokers to look at the viability of capital raising by potentially remortgaging to different lenders. If that is not a likely option the brokers are securing another product with the existing lenders to keep the monthly mortgage costs down. Brokers are often suggesting five year fixed rates not only for the historically low levels and security but for access to slightly lower rental affordability calculations to free up some capital. So there are options for all landlords to either sit tight or increase borrowing where possible.