In my last blog just over a month ago, I focused on summarising Consultation Paper CP11/16 issued by the PRA. We have seen a number of lenders make criteria changes since then, and you should expect more in the coming months.
Firstly, it is important to try to figure out what the buy-to-let market will look like once all of the regulatory and tax changes have been implemented. As none of us have a crystal ball I have made some educated assumptions.
The type of landlords who will be most affected are those buying high value, low yielding properties where high loan-to-values (LTV) are required. Even at low yields, high value properties will produce a sizable tax bill for the landlord and could easily take a non-taxpayer or a basic rate taxpayer into a higher tax band.
Properties with rental yields below circa 5% will be impacted by the higher rental cover ratio requirements. Likewise, landlords requiring high gearing will also need to find properties with decent rental yields to pass the new underwriting tests. In a nutshell, London Zone one and two are likely to be most affected, and we could see LTVs come down in these areas. As you go further out of London increasing rental yields will tend to deal with the higher rental cover ratio requirements.
Top five tips for landlords
1. Rental yields have always been important but now they are critical. Properties with a rental yield below circa 5% are going to be impacted by higher rental cover ratio requirements, so landlords will need to pick those with the potential to achieve a better yield. An alternative would be to put down a bigger deposit. Properties near good schools and with good transport links tend to offer superior yields.
2. The 3% Stamp Duty surcharge is based on the purchase price of a property. Buying a property in need of work, at below full market value, may be an astute financial move.
3. Professional landlords may wish to consider HMOs which normally produce a better yield than a single family dwelling.
4. Landlords should consider putting new buy-to-let properties into a Limited Company structure to create a more tax efficient investment. It has never been so important to advise your customers to consult with a good quality accountant to ensure the correct decision is taken. Limited Companies can be set up easily for as little as £200, but there are some pitfalls that should be considered.
5. Bridging finance may be a little more expensive but it can help landlords buy property that needs development. Any development work will create more equity which, in turn, produces a better yield.