After the general overhaul of the Stamp Duty system in 2014, the government added a 3% surcharge on second homes in April 2016. From April 2017, BTL landlords can now no longer reclaim the full amount of mortgage interest paid on their tax return. The 30 September of this year brings additional change in the shape of the Prudential Regulatory Authority’s second tranche of underwriting guidelines, due to impact investors with larger portfolios.
These issues are far-reaching in scope and controversial in nature. Here at Shawbrook, we commissioned economic think tank, the Centre for Economics and Business Research (CEBR), to take a current and future view of the buy-to-let market.
The report, which can be downloaded here, highlighted some understandable pessimism – with regulatory change potentially pushing smaller landlords out of the market and continuing political uncertainty – but the data indicates that BTL remains a well-capitalised investment, rewarding thoughtful investors who seek specialist advice.
However, this comes with a caveat. Lenders and intermediaries have a tremendous responsibility to work together to ensure that all landlords are fully aware of the hurdles they will face as buy-to-let investors in the coming years.
To quote a much overused but highly relevant line, it all comes down to “education, education, education”.
The prevailing opinion amongst industry experts is that plenty of landlords could be sleepwalking into a potential problem. From speaking to our Shawbrook broker partners during the last few months, a significant amount felt that their clients might not have seen an accountant or tax adviser recently and therefore may not even know about the changes. Landlords with higher levels of borrowing could easily find themselves in a negative cash flow position by the time the mortgage tax relief changes have been fully implemented in 2020.
Clarity is key and along with some of our contemporaries, Shawbrook acted early ahead of the PRA’s 30 September changes to underwriting standards. We consulted our intermediaries on the key issues impacting their clients and also designed a Guideline Document for brokers, introducers and their client base.
Scrutiny of landlord and portfolio
Some of the issues that lenders will have to pay closer attention to include:
• What spread of products does the customer have?
• How highly geared is the portfolio?
• What is the customer’s personal income position? Do they live off this rental income alone and is this sustainable with rising investment costs?
• Can the customer’s returns model cope with the rising tax costs across their portfolio?
• Is there an effective long term plan or strategy in place for the customer’s property business?
It remains to be seen whether the PRA considers the measures put in place by lenders to be sufficient. However, the initial reaction by lending institutions has been positive, with many clearly explaining what they intend to do in order to comply.
So what does this all mean for the future of BTL, and how will the market change over the coming years? Almost all data indicates that professional landlords will be best-placed to weather the changes and we may potentially see smaller investors exit the market altogether. We may see some lenders pulling out of the portfolio landlord market to focus purely on the ‘simpler’ customers with 1-3 mortgaged properties. That being said, we may also see niche products being targeted towards portfolio BTL investors, with an emerging market in this area.
Its impossible to predict the future, but one thing is abundantly clear. The onus is on all lenders and intermediaries to provide the type of considered guidance that the specialist market is renowned for during this key period of transition. Education is king and it will remain so for the foreseeable future.
Karen Bennett is managing director, Shawbrook Commercial Mortgages