Landlords adapting to market changes

Contrary to many expectations, landlords and prospective landlords seem to be increasingly attracted to investment in the buy to let property market.

According to a Property Investor Survey on the 7th of June 2017, the proportion of landlords looking to increase their property holdings has increased by 48% since November 2016 and is up by a surprising 41% over the previous 12 months.

The survey also revealed some notable changes in the mortgage preferences expressed by buy to let investors:

• there has been a distinct switch from three- to five-year fixed rate mortgages amongst investors;
• 42% of those surveyed expressed their preference for five-year fixed rate mortgages, compared to just 33% in November of 2016 and double the percentage twelve months ago;
• three-year fixed rate mortgages appear to be less popular (only 5% of respondents) than 10-year fixed rate mortgages.

The statistics on buy to let mortgage preferences appear to reflect landlords’ adapting to new affordability rules which were introduced by the Bank of England’s Prudential Regulation Authority (PRA), which came into effect in January 2017.

The challenges to which landlords are responding

The Property Investor Survey suggests that investors in buy to let property are adapting to the challenges created by a raft of government and regulatory bodies in the past few years – not to mention the ongoing, background uncertainty of the results of Brexit negotiations, which formally opened on the 19^th of June 2017.

The following are just some of the new market pressures faced by landlords:

Mortgage restrictions

• the Bank of England’s Prudential Regulation Authority (PRA), introduced new rules on lending in January of this year;
• increasing and tightening up the criteria under which lenders may make mortgages available to would-be investors has made it theoretically more difficult for existing landlords to increase the size of their property portfolios and for new buy to let investors to enter the market;
• the changes are designed to make a stricter assessment of affordability of any mortgage in terms of the ratio of profit on rental property income and expenditure on mortgage repayments;

Mortgage interest tax relief

• traditionally, buy to let landlords have enjoyed a tax-free allowance on expenditure on mortgage interest repayments;
• starting with effect from April of this year and for the next four years, that allowance is steadily being phased out and, in future, all owners of buy to let property become liable for tax on the whole of their profits, minus the flat-rate tax allowance of 20%;
• hardest hit are likely to be those landlords already in the highest tax ratings of 40% or 45% – since they are going to pay significantly more in tax – but even those landlords currently on lower ratings are likely to be pushed into higher tax brackets, and so, are also going to have to bear a heavier tax burden;
• on the 21^st of November 2016, the Telegraph newspaper described the effects of the changes which are being made and also included a simple buy to let calculator, with which you may compute the way the new tax regime is likely to reduce your profits as a landlord;

Stamp Duty

• since April 2016, anyone buying a second property – in addition to their main home – that is valued at more than £40,000, has to pay an additional Stamp Duty surcharge of 3%;
• clearly, this affects practically every buy to let investor, who is hit by the increased tax when purchasing a property;
• just how much needs to be paid in Stamp Duty of course depends on the purchase price of the property, but the Consumers’ Association’s Which? magazine has published a Stamp Duty calculator as a ready reckoner;

Wear and Tear Allowance

• in the same month of April 2016, landlords also saw an amendment to the way in which tax allowances may be claimed on repairs and maintenance to let property – the so-called wear and tear allowance, which was formerly granted as an automatic matter of course;
• now, landlords may only claim up to 10% tax allowances on money actually spent on maintenance, repairs or the renewal or replacement of furnishings and fittings – but it is important to remember that there is still no tax allowance on money spent improving your let property.

Clearly there have been many changes for landlords to take on board and new challenges to confront when attempting to run a profitable buy to let business. Surveys such as the one referenced above, however, suggest a decided resilience in this sector of the property market, with investors adapting to change and still being drawn to buy to let businesses.