There have been a raft of changes in regulation over the last few years and these have had major implications for landlords. Here’s a quick run down:
- April 2016: A 3% second home and buy-to-let (BTL) property stamp duty surcharge was introduced
- April 2016: The 10% ‘wear and tear allowance’ was removed. Only actual, quantifiable permitted costs can be offset for tax purposes
- January 2017: New rules governing Interest Coverage Ratios (ICR) and rental affordability assessments were introduced
- April 2017: Income tax changes for rental income were introduced (to be phased in over a four-year period, fully implemented from April 2020)
- April 2017: The Financial Policy Committee gained new powers to directly control ICR and BTL mortgage loan-to-value (LTV) restrictions, if needed
- September 2017: New rules introduced for ‘portfolio’ landlords
You may recall our article last year on the buy-to-let (BTL) mortgage market, with a particular focus on the options available for ‘amateur’ landlords in light of these changes.
This time, I will focus on the changing landscape for the ‘professional’ landlord. I’ll outline some of the diversification in mortgage options and types of property being purchased we’re seeing, and how an intermediary is vital to this sector.
Buy-to-let opportunities
Thanks to increased competition among lenders, the number of BTL products available has hit its highest level since the beginning of the financial crisis in October 2007, according to data from Moneyfacts. Over the past 12 months, the total number of available BTL products has risen by 21% to 2,396 in June, up from 1,929 the previous year.
The average mortgage rate has dropped thanks to the increasing options here, with an average two year fixed rate now at 2.88% (compared with 6.36% in October 2007). These increased options and lower mortgage rates show there are currently some good opportunities out there for landlords.
Expanded options have also been seen in lenders’ criteria. As more challenger banks in particular have entered the BTL mortgage market, they are increasingly looking to specialise in criteria for professional landlords.
Recent data by the Intermediary Mortgage Lenders Association (IMLA) illustrates why this market is attractive to lenders. It analysed the Government’s 2018 English Private Landlord Survey, which showed that professional landlords now represent 48% of the Private Rented Sector (PRS) – up from 38% in 2010. The number of single-property landlords make up just 21% of the PRS today, down from 40% in 2010.
Portfolio Landlords
In September 2017 one regulation change that directly affected professional landlords was the introduction of a portfolio landlord criteria. If a landlord already owns four or more mortgaged buy-to-let properties, or has the ambition to build their portfolio, they are classified as a ‘portfolio landlord’ with additional regulatory requirements for lenders to factor into their assessments.
The regulations do not specify exactly what additional steps a lender must take in assessing a mortgage application for a portfolio landlord and the requirements differ between lenders. Some examples of the factors a lender should consider include the experience of the landlord, the overall financial position of the portfolio and the personal financial situation of the borrower.
How can an intermediary help you as a portfolio landlord?
Not all lenders will lend to portfolio landlords. Of those that do, the documentation requirements and the criteria on which they decide if the portfolio is acceptable can differ drastically. As such, a good intermediary with experience of these lenders can navigate these options for you, while also doing the majority of the paperwork on your behalf.
We have many clients who are classed as portfolio landlords. We have expertise in helping clients refinance and build their property portfolios, and have strong relationships with all the key lenders in this market.
Limited company buy-to-let
There have also been increased lending options for limited company BTL applications in the mortgage market, and an increasing number of professional landlords have been purchasing in this manner in recent years. Whether it ultimately works out as being cost effective for you depends on your income, mortgage rates and fees, along with capital gains tax, inheritance tax and income from dividends, as well as a myriad other factors.
It’s important to get professional tax advice on this before making any decisions about purchasing your BTL. Our advisers will talk you through your options and will be able to recommend a tax specialist if you do not already have one. A vast number of limited company BTL options, regularly including the best buy rates, are only available via intermediaries.
Looking for rental yield
We are seeing a notable uplift in professional landlords looking to diversify their property requirements when looking at new investment opportunities. In particular, the regulation changes have seen landlords look for properties with increased yields to maximise profits.
This means landlords are looking for property types that do not fit the conventional mortgage lenders’ buy-to-let requirement. These include holiday lets, student lets, Houses in Multiple Occupation (HMO) and Multi-Unit Blocks (MUBs), as well as some properties with a commercial element to them.
Most high street lenders that offer buy-to-let mortgages will not accept applications for any of the above property types. However, intermediaries who work regularly with professional landlords will have access to several lenders that specialise in these fields. Often they will have separate product options for these property types, normally with a slightly higher interest rate and lender fee.
It is also vital that intermediaries check the property type against the lender’s criteria before they submit the application. Valuation fees will not be refunded if the application proceeds and the property, when valued, is not within policy.
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Case Study
Let’s take a look at a recent case study of a professional landlord client of ours who was purchasing a new BTL property to add to his portfolio.
The client
Our client, David (name changed), had found a new property to purchase. The property was a four-bed house in the countryside which our client felt would make a great rental investment. The property had a lot of land attached to it, which he had been advised was a problem to some lenders. He also wanted to purchase through a limited company that he had set up. The company was set up as a special purpose vehicle (SPV), so was created purely to purchase investment property.
David was classified as a portfolio landlord as he had an existing portfolio of seven mortgaged buy-to-let properties. Most of the properties in the portfolio had quite small mortgage commitments, but one was a recent purchase at 75% loan-to-value (LTV) and this property was causing issues with passing the portfolio landlord background property stress test requirements for the lenders he had approached.
The solution
We approached a lender which came to market last year with criteria that specialises in the professional landlord market. Despite the quirky property type and its large size we ran this by them pre-application, along with the client’s business plan and portfolio details, so these elements were agreed upfront.
The mortgage
Property value: £320,000
Loan amount: £220,000
LTV: 69%
Rate: 3.6% 5 year fixed rate
APRC: 4.56%
Term: 20 years
Lender arrangement fee: £2175
Mortgage payment: £660
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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT
