Landlords with buy to let mortgages are finding it hard to offer tenants long-term tenancies because many lenders refuse to support tenancies longer than one year.
CML Refutes Claims
The underlying problem is the Council of Mortgage Lenders and Insurers, which says tenancies lasting more than one year are not permissible. Their reasoning is that if a landlord defaults, the lender would not be able to sell the property to recover the debt with a tenant in situ.
However, the CML refuted such claims, saying that more than half of lenders did not place restrictions on the length of tenancies. It says a study carried out by Shelter found that half of all buy to let lenders were happy for landlords to offer longer tenancy agreements.
“As Shelter has said, any landlord wanting to offer a longer tenancy should be able to find a suitable lender. And anyone renting should be able to ask their landlord for a longer term, confident that lending conditions aren’t going to be a barrier.”
NLA Says Lenders Could Do More
Chris Norris from the National Landlords Association says lenders could still do more to help. He points out that many landlords are still on historic legacy mortgages, which do not have such flexible terms. A number of mortgage products are set to a maximum tenancy of two years, which may not suit tenants looking for a long-term tenancy.
Some landlords complain that restrictive lending conditions are a real barrier, so the advice here is shop around for a suitable product and always check the key facts before you sign.
Landlords are about to lose mortgage interest tax relief. This means they will no longer be able to deduct mortgage interest from their income. The National Landlords Association (NLA) says this will push 440,000 landlords into a higher rate tax bracket.
Mortgage Interest Relief to be Phased Out Next Year
At the moment, landlords can offset their mortgage interest against any tax. However, from April next year, this is being phased out. By April 2020, the tax saving will be phased out completely and landlords will no longer be able to offset any mortgage interest against tax. For landlords who have mortgages, this is disastrous. 40% income tax payers will have to pay significantly more income tax on their earnings from rental properties, which could make buy to let investment no longer worth the time or the effort.
Unfairly Penalising Landlords
Some experts believe that the government is wrongly punishing landlords for problems affecting first time buyers, when in reality it is the lenders who are at fault for charging first time buyers more when they need a high percentage mortgage. The government seems determined to penalise landlords.
Many landlords barely break even as it is, so they will have no choice but to increase rents on their properties to recover some of their costs. Those that can’t recover the extra costs will be forced into selling their properties.
These are difficult times for landlords. Are you going to be affected by the government’s tax changes? If so, let us know in the comments.
London is not the most profitable place for landlords to invest. Although there are plenty of tenants looking for properties, house prices are too high, which impacts greatly on rental yields. Despite this, one London estate agent believes there are a few buy to let hotspots for quick off the mark landlords.
Ilford will be well connected once Crossrail arrives in 2017, so it is an up-and-coming area for commuters. Property prices are still affordable in Ilford, so rental yields are around the 5.5% mark.
Hounslow and Greenford
Hounslow is close to Heathrow and is well connected, thanks to the M4 running nearby. Greenford is also attractive to renters, as it too benefits from good transport connections and now the Night Tube. Both offer a rental yield of 5.3%.
Croydon and Wood Green
Croydon is a nice little hotspot for buy to let landlords. It is also a lot more affordable than central London and you can expect to enjoy rental yields of around 5%. Wood Green is on the Crossrail 2 map, so it is primed for regeneration. Again, rental yields are said to be 5% here.
Whitechapel and Forest Gate
Whitechapel is one of the few central London locations that offer a decent return for landlords. Crossrail has put Whitechapel on the map and many people are moving here. Forest Gate has also seen a significant boost thanks to Crossrail, yet it is still very affordable. Both offer rental yields of 4.8%.
Other areas worth considering are West Drayton, King’s Cross and Acton.
Thanks to recent tax changes, many landlords are considering their options. Some have decided to pull out of the buy to let market altogether whereas others are downsizing their portfolios. One alternative that you may be thinking about is investing in overseas property, but is this a viable option?
Overseas Investment a Challenge
Online letting agency, PropertyLetByUs, has surveyed 500 property investors and found that a large number are seriously considering the merits of the overseas property market, with France and Spain the most popular would-be destinations. However, PropertyLetByUs is warning would-be investors that investing overseas is not without its challenges and if landlords are tempted, they need to think very carefully about the type of fiscal regime they face.
Jane Morris, managing director of the agency warns: “Each country has different tax laws relating to property and they can change quickly, with little warning. For example, in 2012 the French Government imposed a 15.5 per cent social charge on capital gains from the sale of second homes or rental income – a measure which was estimated to bring in €250 million a year. Tax on rental income rose overnight, from 20 per cent to 35.5 per cent, while capital gains tax on property sales rose from 19 per cent to 34.5 per cent.”
Investors were hit hard by the ‘social charge’ and it wasn’t until 2015 that the tax measure was overturned by the EU on the basis that it was illegal.
Morris advises landlords to think very carefully before investing overseas, as it may not always be a bargain.
Landlords looking to purchase properties as holiday lets could soon be affected by a controversial decision in St Ives. 80% of people in St Ives voted for a proposal that means new housing developments will not get planning permission granted unless the homes are reserved for full-time residents. Councils in the Lake District, Isle of Wight, Derbyshire and North Devon are now all considering a similar scheme.
Local People Can’t Afford to Buy
The vote comes after it was revealed that 48% of homes in St Ives town centre are second homes or holiday lets. As a result, local people are struggling to afford to buy properties there, particularly in the summer when rents spiral.
“The plan will be monitored in the same way as other residency restrictions,” says Edwina Hannaford, Cornwall’s council’s planning portfolio director.
“Occupiers of homes with a Principal Residence condition will need to provide proof, if requested by Cornwall Council, that they are meeting the condition. Proof could include, for example, that they are included on the local electoral register and registered for and attending local services such as healthcare and schools.”
Landlords Can’t Buy New Homes
If this decision is copied by other councils in popular tourist hot spots, it will affect landlords hoping to invest in new properties to let out to holidaymakers. Holiday cottages and flats in popular tourist areas such as St Ives can easily command rental income of up to £2,000 per week in high season.
However, all is not lost as landlords can still snap up older properties in the town.
According to the Council of Mortgage Lenders (CML), the buy to let sector could be heading for a big slump. Changes to the way landlords are taxed is having an effect on an otherwise strong market and the CML believes that the number of people investing in buy to let property is likely to fall over the next few years.
Landlords Considering their Future
Landlords no longer receive higher-rate mortgage interest tax relief and anyone owning a second property will be subject to 3% stamp duty from next April. This, in conjunction with warnings from the governor of the Bank of England that extra restrictions might be placed on landlord lending in order to dampen down the sector, mean than many landlords are considering their future.
The CML says buy to let transactions account for 9% of all property being bought and sold in the UK and 16% of mortgages during 2015. This is a lot lower than in 2006 – 2008. Then the property market became increasingly overheated just before the big financial crash of 2009.
“Future prospects are closely tied to potential macro-prudential regulation and incoming tax changes. We currently expect buy to let house purchase activity in 2016 to fall below its 2015 level, and for activity in 2017 to fall below the level seen in 2014,” says the CML.
Many Landlords to Sell Up
It seems likely that many landlords will be looking to unload their properties before the new stamp duty changes kick in, which will cause higher activity levels in the first quarter of 2016.
Barclays is the first of the high street lenders to impose stricter affordability checks on buy to let borrowers ahead of government changes to landlord tax relief benefits. The new, stricter affordability checks reflect fears that many landlords will struggle to make payments on their buy to let mortgages once interest rates rise.
At the moment, rental income needs to be 125% of monthly mortgage payments, but as of Monday 6th December, landlords will need to demonstrate that rental income is at least 135% of their monthly mortgage payment.
A Responsible Lender
“As a responsible lender, Barclays wants to ensure that our aspiring landlord customers can afford the increase in tax liability once these changes come into force,” says Barclays in a letter to mortgage brokers.
The Bank of England is also concerned about buy to let borrowing. They say buy to let landlords will ‘be more vulnerable than owner occupiers to an unexpected rise in interest rates or a fall in income’.
Other Lenders could Follow Suit
Experts are now warning that other lenders in the buy to let sector are likely to follow Barclay’s lead and tighten up their lending criteria.
‘This is a big change from Barclays and could well spark a number of similar reviews from lenders who want to be seen to be taking into account the effect of forthcoming tax changes,’ warns the director of Coreco Mortgage Brokers.
‘With buy-to-let very much still in the crosshairs, it would be no surprise if further action is taken against what is now seen as an easy target.’
Finally things are looking up for landlords as rental prices have gone up, taking cue from the recent RICS survey. However all is not good as some tenants face financial pressures leading to increased rents.
The UK’s leading representative body for private-residential landlords, the National Landlords Association (NLA), in their research found that nearly three quarters of landlords are experiencing rental arrears. A dismal 43 per cent of these occurred in the last 12 months.
Luckily all’s not lost. The NLA Rent Guarantee Insurance allows a way for us to minimise the risk that occurs due to loss of rent. Legal expenses and a 24-hour advisory service are also provided if other problems arise. Landlords can now relax with the NLA Rent Guarantee Insurance as it gives some much needed piece of mind.
Redundancy and unemployment among some tenants is making them struggle with the payment of rents but nevertheless there is a need to safeguard rental income.
Even as the insurance has come as a ray of hope, as landlords we need to take full references and make checks at the outset of a tenancy. Keeping in touch with your tenants will enable them be upfront when they face difficulties and you can make arrangements before rental arrears become more serious.
The Government is starting to show signs of recognizing that the property market has a major role to play in the recovery of the UK economy. This week we heard news that they are considering granting institutional investors a stamp duty concession in an attempt to lure them into being professional landlords.
This is clearly an attempt to revitalise the property market and is something to be applauded. Furthermore, the decision to try for this particular change came after discussion with property advisors so it is great to see the Government talking to those who really know how this sector works.
The way the proposed changes will work is that instead of the stamp duty being calculated based on bulk buying, it would be bought down to a singular stamp duty fee for each property. In other words, to simplify things, the landlord who buys properties in bulk would be paying the same amount of stamp duty as everyone else. There’s a thought!
This could be an excellent opportunity for landlords who are looking to rapidly expand their portfolio and to do so without attracting ridiculous amounts of stamp duty like they have in the past.
As previously reported on this blog, Nationwide recently released the results of a survey that clearly indicated we could expect a 10% to 15% rise in property prices in the UK in 2010. Quick as an eye blink, Halifax has taken the wind out of the sails of that good news by releasing their own survey that seems to say almost the opposite.
According to them, the growth we saw in January was around 0.6% down from a six monthly average of 1.1%. This leads them to get fairly gloomy and suggest that perhaps the increase in properties coming to the market will see pressure on prices stifling any rises.
It is true that houses are being bought to market fairly quickly as home owners are galvanized by what looks like a little light at the end of the tunnel. People have been stagnant for a long time now and many of them are desperate to take advantage of any improvement in property prices to sell up and move on.
The closure of the Bank of England’s quantitive easing program is likely to mean that UK base rate stays low for a further fairly prolonged period. The bottom line, however, is that if more properties become available but mortgage lending does not increase then we are likely to see a downward pressure on prices.