A past, present and future view of BTL

by: Karen Bennett, managing director of Shawbrook Commercial Mortgages
  • 13/06/2017
  • 0
A past, present and future view of BTL
The private rented sector (PRS), and in particular buy-to-let, is in a state of flux with the impact of new affordability rules and a changing tax-regime high on the agenda.

At Shawbrook, we commissioned economic think tank the Centre for Economics and Business Research (CEBR), to take a current and future view of the private rented sector, and in particular the buy-to-let market. Some of the key issues are discussed below.


New landscape

New rules introduced last year mean landlords now pay an additional 3% Stamp Duty Land Tax on their house purchases. In many cases this adds thousands of pounds to the cost of an already expensive transaction and caused many to rush through contracts before the deadline of April 2016 to avoid the levy.

The report shows transactions had been steady at around 100,000 per month from 2015 until February 2016 before dramatically increasing to 170,000 in the month before the changes were introduced. After the deadline, transaction levels more than halved and they are yet to recover.

That was just the first of a series of new obstacles which private landlords have to negotiate. When combined with additional challenges such as changes to wear and tear allowances, the abolition of mortgage interest relief, and stricter underwriting rules, some are now questioning the longer term viability of parts of the buy-to-let industry.

These all have serious implications for landlords. Yet there is clearly still demand for property as an investment; the government collected some £1bn in Stamp Duty tax receipts in the second half of last year alone, even after the new levy was introduced.

But additional costs raise concerns about affordability for private landlords and there is a growing fear that this group of investors is being penalised, while institutional landlords are exempt from many of the incoming changes.


Changing strategies

Higher costs are forcing many private landlords to re-evaluate their strategy. Some are looking to alternative locations, outside of London and the South East, for example, where lower house prices reduce the burden of stamp duty and the size of deposit.

Some brokers say that, while the number of loans they are processing has remained steady, the size of the average loan has fallen, whereas others are seeing landlords explore different asset classes altogether.

Another area landlords are exploring is whether they should incorporate rather than remain a private landlord – limited companies will be unaffected by changes to mortgage tax relief, and are likely to be able to achieve higher levels of borrowing as a result.

However this strategy presents its own problems; transferring a property from individual ownership into a company is treated like any other property sale and incurs the usual raft of stamp duty expenses, not to mention the associated capital gains implications.


Mortgage free

The Shawbrook BTL report shows that some landlords are, instead, showing an increased appetite to become mortgage-free as an alternative way to avoid the impact of mortgage tax relief changes, which could eat away at all-important rental income.

Indeed, this may be another reason why properties outside the South East are becoming increasingly attractive. In the North of England house prices in many regions are yet to recover from the trauma of the financial crisis.

In these areas landlords can snap up desirable properties for as little as £60,000; in London they may need that amount just for a deposit.

There is a growing view that the affordability crisis doesn’t actually exist outside of the capital. Many brokers and landlords alike are frustrated that the national debate about buy-to-let has become far too London-centric.


Landlords blamed

There is also a sense that landlords are being blamed for changing behaviours in society, but there are lot of factors changing the industry and it is perhaps far too simplistic to look at the property market as landlords versus homeowners.

In many cases, for instance, the two types of buyer are looking for very different properties; homeowners typically prefer to buy detached houses whereas landlords are more likely to buy flats or a property in need of renovation.

Research from Shawbrook shows around 36% of buy-to-let mortgages are for the purchase of flat while 34% of loans are for terraced homes.

Other hot topics in the report include the impact of attitudinal shifts among younger people, the view on government incentives, and the need for education throughout the industry.

While there are challenges ahead for the market, it is worth noting that the research conducted shows an overarching positive sentiment in spite of some adverse headwinds, with buy-to-let continuing to offer customers numerous growth opportunities in the years ahead.


The full report can be downloaded from the Shawbrook website.

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