There is a lot to unpack in these measures, some of it good – for example, who could argue that tenants shouldn’t be housed in ‘decent homes’. But some of it which puts a further burden on landlords, over a period when the burden has become far greater than it has ever been and where the costs of being a landlord are only going one way. Up. 

‘Bad’ landlords 

For a start, the paper talks about ‘redressing the balance’ between landlords and tenants which reminds me of the ‘two legs bad/four legs good’ approach of the animals in George Orwell’s Animal Farm.  

Here it appears that landlords are still the ‘bad guys’ who don’t really deserve to own these properties, and if we – the government – can continue to raise their costs, to make it more difficult for them to gain back their properties, to make a profit on an investment, etc, then more properties will flow from the PRS into owner-occupation. 

Of course, this is a fabulous misreading of the needs of the UK housing market and the key role that the PRS plays in housing 4.4 million tenants. For those who might fail to understand, 4.4 million people will not be in a position to buy a home just because the government thinks this is a zero-sum game where landlords have been holding back millions of first-time buyers. 

Michael Gove talks about tenants at the mercy of ‘unscrupulous landlords’ yet the paper explicitly says that the majority of tenants enjoying safe and secure rentals. It can’t be both, so which is it? 

High satisfaction 

The government’s own work into private rental tenants, groups them into six demographics: Comfortable Renters (44 per cent); Low Income Savers (16 per cent); Families Getting By (17 per cent); Older Renters (three per cent); Vulnerable Singles (10 per cent); and Struggling Families (11 per cent).  

Read into this research and you’ll see the majority of tenants do not struggle to pay their rent, again with most happy in the PRS, feeling that they have an opportunity to purchase if they wish to in the future, and are generally satisfied with their current accommodation.  

There is cause for concern for those who are not housed in good homes, and clearly action to be taken against the small minority of landlords who take advantage of these people, but the majority appear to be in a decent space. I find it therefore hard to understand a set of policies that seeks to ensure greater under-supply of PRS properties, when demand is actually rising, which is likely to translate into higher rates at a time when the cost of living is increasing. 

The need for rental homes 

We’ve heard a lot about economic self-harm in the last few years, but – and this is worth reiterating – you don’t shift ‘Generation Rent into Generation Buy’ by removing a supply of property that Generation Rent rely upon, while they work/save their way to becoming owners. It is crazy to do this and again, will only result in higher rents based on lower supply. 

As mentioned, anyone who works in this sector is all for decent homes, for ensuring tenants’ rights are maintained, and ensuring they have as much security and certainty of tenure as they need. But it should surely work both ways?  

Here, tenants appear to be able to leave tenancies at the drop of a hat, not being liable for rent not paid, but landlords have to jump through hoops to secure a property back, even with a sound reason. 

Again, the scales are severely weighted on one side, and this is only going to produce a further unbalanced market. As we move further into 2022, we should prepare ourselves for much anguish about rents rising, but when you have an imbalance of supply and demand, and you pursue policies which only exacerbate this, then you’re likely to get price increases.  

The phrase, reap what you sow, somehow comes to mind. 

But brokers believe this may be a cyclical shake-out as landlord’s re-assess their position as the impact of tax changes which started to be phased in five years ago.

Mark Dyason, owner at Edinburgh Mortgage Advice, said these changes, combined with rising house prices, have acted as a catalyst to push the more reluctant or wavering landlords into selling up

Tax changes date back to April 2017 and the introduction of Section 24 of the Finance (No. 2) Act 2015. This made some types of property investment less profitable than they were previously with restriction on mortgage interest relief, which has been phased out.

From April 2020, landlords were no longer be able to deduct mortgage costs from  rental income, so all rental income earned will be taxable; instead landlords receive a 20 per cent tax credit which can be used to offset their tax bill.

Dyason said: “My experience is that landlords are exiting for a few reasons, namely the new tax regime that has cut income, the increased legislation that has raised costs and a housing market that has pushed up house values faster than rents have risen, so the yield isn’t as good.

End of the dinner party landlord

Another factor may be the age of landlords. Dyason said: “The Dinner Party landlord of the naughties is also getting to retirement age and will be looking at their options. All of this is a boon to first-time buyers or would be if there wasn’t a dozen for each former buy-to-let property hitting the market.”

Jonathan Burridge, founding adviser at We Are Money, agreed the tax changes were now starting to be felt in the pocket. “It is not the get rich scheme it was perceived to be 10-15 years ago. There is a growing gap between rent and purchase price which means larger deposits.”

Imran Hussain, director at Harmony Financial Services said his clients were also finding requirements from Local Authorities onerous. 

“The selective licensing costs introduced by many local councils are passed on to renters, whichever way we cut it. The changes in tax rules are also making some dinner party landlords who are nearing retirement age start looking at offloading properties whilst prices are as high as they have ever been, which in no way benefits first-time buyers as when they sell, another landlord simply purchases the property.

“Giving landlords an incentive such as reducing capital gains or putting a cap in place may allow some landlords to sell properties at a lower price, which could benefit first- time buyers but that is not likely to happen.

Ian Hewett, founder at The Bearded Mortgage Broker had a more pessimistic view and blames the introduction of energy performance certificates (EPC) as another catalyst for landlords likely to exit.

“As I am a landlord myself, I have seriously considered exiting the market as the return on investment is not as strong as it once was.

“This, alongside potential Government focus on energy performance certificates, a lack of support with problem tenants and a failure to regulate poor landlords make this a volatile, combustible situation.

“As the available properties diminish due to demand, the cost of rent rises accordingly and will force some tenants out into the street at the hands of a few ruthless landlords trying to squeeze a massive profit. How is all of this fair for all involved? The onus is on the Government to do the right thing for all involved. Sadly they don’t have a history of doing that.”

The government’s EPLS for 2020/21 found that 42 per cent of 9,000 landlords surveyed went into the market because they saw property as a solid investment while 40 per cent considered it as part of their retirement financial planning to supplement their pension.

Over a third, 35 per cent, became landlords having bought their first property with the intention to live in it themselves.

Buy-to-let landlords were more likely to view their role as a landlord as a long-term pension investment with 58 per cent saying so, compared to those with other kinds of loans or those with no borrowing debts at 44 per cent and 51 per cent respectively. Additionally, seven per cent of buy-to-let landlords see it as a business compared to three per cent of those with other kinds of loans and two per cent with no borrowing.

Some 34 per cent of buy-to-let landlords reported that they see their role as an investment in capital growth, compared to a quarter with those borrowing other kinds of loans and 19 per cent of those with no borrowing debts.

However, the investment doesn’t come without risk, according to Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.

She said elderly investors should not be overly reliant on property as a retirement plan in the case of a market downturn, and that being a landlord is rife with costs and legal stressors particularly when it comes to selling.

“This could be especially difficult if you needed to sell quickly to fund long-term care for instance,” she added.

Landlords can also find themselves hit with stamp duty, legal fees and ongoing maintenance costs stacking up over time, which grows exponentially the more properties a landlord has. Rent is also taxed, as are any profits when it comes to selling up.

Morrissey added: “If you plan to be a landlord into your retirement, then you will need to factor in the work being a landlord entails and if you aren’t able to do it then you will need to pay someone who can. It is important to take a long-term view of these costs when deciding to take the leap into becoming a landlord.”

Growing privatisation

The number of households in the private rented sector rose by 45 per cent between 2008/09 and 2020/21, from 3.1 million to 4.4 million households. It is now the second largest tenure in England, comprising 19 per cent of all households, having grown five per cent since 2008/09, when it was smaller than the social rented sector.

Landlords with buy-to-let mortgages were more likely to have multiple properties than those with other types of loans, or no loan at all. One in three, 33 per cent, of landlords with a buy-to-let mortgage owned one property, with the remaining two thirds, 67 per cent, owning two or more.

The use of alternative loans is growing too. Nearly two thirds, 62 per cent, of landlords with non-BTL loans owned one property, up 11 per cent from 2018.

Over a third, 43 per cent, of landlords own one rental property, accounting for 20 per cent of tenancies, while 18 per cent own five or more, taking up 48 per cent of tenancies.

The gender divide shows that 44 per cent of landlords are women. Women are also more likely to own just one property, 55 per cent, while male landlords tend to have a bigger portfolio.

The stress of tenants and rent

The survey found that things can get complicated when it comes to dealing with tenants, which have an increasingly high turnover for private landlords.

There are around 3.9 million live deposits registered with government-backed tenancy deposit protection (TDP) schemes in England. Of an estimated 438,000 registrants comprising landlords and agents, around 408,000 were landlords who had registered the deposits themselves. However, only 62 per cent returned the full deposit at the end of their last tenancy.

Landlords with one property most commonly had either one tenant in arrears, at 67 per cent. As a result of the pandemic, 18 per cent of landlords negotiated a new arrangement, of whom 49 per cent reduced the rent, and 31 per cent had a deferral arrangement.

Evictions are getting harder

The government has announced plans to reform the private rented sector, including the removal of ‘no fault’ evictions under section 21 of the Housing and Planning Act.

While 67 per cent of evictions in the last year were no fault evictions, one in four landlords had to issue a section eight notice for breaching the terms of tenancy. One in 20 offered to pay the tenants to leave.

Families are also increasingly likely to rent, with 1.3 million families, or 30 per cent, including dependent children in 2020/21.

Nearly half of landlords, 45 per cent, increased the rent on new tenancies. Only 35 per cent kept the rent at the same level, and just eight per cent decreased the rent. For renewals of existing tenancies, 64 per cent of landlords kept the same rent, 26 per cent increased it, and four per cent decreased the rent on renewal.

The vast majority, 84 per cent, were unwilling to let to someone with a history of rent arrears. Meanwhile more than two fifths of landlords, 44 per cent, were unwilling to let to tenants on either housing support or universal credit.

Nearly half were unwilling to let to included students, 48 per cent, tenants with pets, 45 per cent, and 44 per cent were unwilling to let to tenants requiring adaptations to the property.

A survey of 1,000 landlords conducted by Shawbrook found that 24 per cent would completely bypass low rated homes, while a further 24 per cent will consider energy efficient homes first. 

Government proposals suggest new rental tenancies will need at least an EPC rating of ‘C’ by 2025, while existing properties will need to be renovated and improved to this level by 2028. 

As older homes are less likely to have EPC ratings of C or above, 15 per cent of Shawbrook’s respondents said they will only purchase homes built within the last 20 years.

Period homes could become a thing of the past

Shawbrook warned that the new rules could have an impact on the types of properties landlords choose and potentially create an issue for the UK’s housing market. The lender said demand for period homes could dwindle, leaving current owners unable to sell unless they make improvements. 

Landlords predict that EPC-related refurbishments will cost them £5,900 on average. 

The survey also found that 28 per cent of landlords had already received at least one complaint from tenants regarding a property’s EPC rating, while 16 per cent said they had received multiple. 

Respondents said they were more likely to make changes to a property if tenants asked them to, with 61 per cent agreeing with the statement. 

Emma Cox (pictured), managing director of real estate at Shawbrook, said: “It’s concerning to think that a significant proportion of properties, within the private rental sector, could fall out of favour due to poor EPC ratings and significant improvements needing to be made in a short period of time. The market has a responsibility to offer landlords more guidance on what the proposed legislation will mean for them, where to start with improvements, and how to sustainably finance the works.

“Proactive landlords already making changes ahead of the proposed deadline will be in a strong position for the future, constantly one step ahead of the upcoming changes. While our research shows that most landlords are set to commence improvement works within the coming 14 months, making changes sooner rather than later will limit the risk of supply and labour shortages as we edge closer to the proposed 2025 deadline.” 

According to Moneyfacts, the average rate for a two-year fixed buy-to-let product now stands at 3.41 per cent, up 0.51 per cent from December, prior to base rate increases. 

Five-year fixes now have an average rate of 3.56 per cent, a rise of 0.38 per cent when compared to December. Yet Moneyfacts said that any landlords refinancing from a five-year fixed would have a cheaper rate today, as the current average is lower than the 3.68 per cent rate in 2017. 

In April, the average two-year fixed buy-to-let rate was 3.22 per cent while the average rate for a five-year fix was 3.42 per cent. 

As of May, there are 3,374 buy-to-let mortgages available which Moneyfacts said was the highest number of deals recorded since May 2008.  The number of available deals has therefore remained reasonably stable, with just 61 fewer products on the market compared to last month. 

At higher loan to value (LTV) tiers, above 85 per cent, there are 79 products on the market compared to 80 in April. 

Average rates at higher LTVs are also lower than they were in December, with two-year fixes dropping from 5.17 per cent to 4.8 per cent, and five-year fixes falling from 5.22 per cent to 4.93 per cent. 

Challenges remain 

Eleanor Williams, spokesperson at Moneyfacts.co.uk, said: “Product availability in the buy-to-let sector remains strong, which will be positive news for landlords who saw volumes fall significantly during 2020.   

“However, there are indications of an ongoing disparity in the limited supply of rental property available and the growing level of demand from tenants, with 93 new applicants registering per branch in March, compared to 78 in February, according the latest Propertymark Private Rented Sector report.” 

She added: “Landlords may have a greater choice of products, but the average rates on offer are on the increase.  

“Rising interest rates and supply of property are not the only factors that may impact landlords in the months to come, as tax changes and the cost of living crisis may already be pinching the potential profitability of investing in property – although recent information from Hamptons suggested that the first quarter of 2022 was the ‘most active’ for landlords since 2016 when the stamp duty surcharge on the sale of second homes was introduced.”  

A ‘hostile environment’ 

Williams added: “Rental reform featured in the Queen’s Speech, highlighting the current challenges facing consumers. Some landlords could feel that, coupled with other changes such as stamp duty surcharges and tax burdens, this is creating a ‘hostile’ environment, which could see some consider leaving the sector altogether.   

“Providers will need to work hard to attract new business in the months to come, so it will be interesting to see how the buy-to-let market adjusts to external factors.” 

YBS Commercial Mortgages has removed the minimum threshold on the amount an individual landlord can borrow where they have at least six buy-to-let properties mortgaged, or to be mortgaged, with the lender; or 11 or more buy-to-let properties mortgaged with all lenders, including YBS.

If a landlord does not fit one of these criteria, the lender will consider applications starting from £3m.

Mike Davies, head of business development at YBS Commercial Mortgages, said: “Previously, a landlord needed to have at least six properties with us, as well as to borrow at least £1.5m to be considered for a loan. These changes widen the qualifying criteria to include more borrowers, which is great news.”

Habito

Habito has also announced an update to its BTL range, with the launch of longer-term fixed rates for landlords, at seven and 10 years, at 80 per cent and 85 per cent loan to value (LTV).

It has also added an 85 per cent LTV product across the full range of terms which will be open to properties with an EPC rating between A and C and a minimum property value of £100,000.

The lender is also increasing its maximum loan size from £1m to £2m to help further support landlords based in London and the South East.

Alan Fitzpatrick, VP lending at Habito said: “We know that landlords have seen the multiple base rate hikes from the Bank of England since December, and are considering fixing their rate for longer to get that security over their monthly mortgage repayments and protect their rental yield.

“Our new 85 per cent LTV products will also reward landlords with properties with better energy performance ratings as we try to encourage them to think ahead to the upcoming EPC changes which will require buy-to-let properties to have a rating of C or above by 2025, to begin a new tenancy.”

No idea? I’m not entirely surprised as it’s been five years since they were in the news and sent shockwaves throughout the buy-to-let sector. Still unsure? Then let me elaborate.  

They’re actually the reference numbers of the consultation paper from the Prudential Regulation Authority (PRA) and the supervisory and policy statements from the Bank of England which were introduced due to concerns about the potential harm to the UK housing market from uncontrolled and unaffordable buy-to-let lending. 

Difficult as it might be to believe, we’re approaching the fifth anniversary of the introduction of new affordability standards which came into force on 1 January 2017 to bring all lenders up to prevailing market standards.  

The new rules were also introduced to act as a guard against any slipping of underwriting standards during a period in which a firm’s growth plans could be challenged by the changing economic landscape and the impact of any forthcoming tax changes. 

Longer term security against rate changes

Lenders were quick to embrace the new rules, with many introducing additional checks for customers opting for longer-term products to ensure they were in a position to manage any potential payment changes at the end of their product term. 

Those investors who took up a five-year fixed rate mortgage back in 2016 will now be on the look-out for a new product as they approach the end of their initial fixed rate period. In fact, recent research by Twenty7Tec shows remortgage searches accounted for more than 40 per cent of the mortgage market in October, the first time this year they have reached that level. 

Five-year fixed rate mortgages will always be a popular choice for landlords.  

As I write this article, there are currently 1,258 five-year fixed rate buy-to-let mortgages available to landlords according to Moneyfacts and mortgage rates are at, or are certainly around, the lowest they’ve ever been. 

The Bank of England finally increased the base interest rate after much speculation, and it’s widely predicted it will rise further in the not too distant future. 

It means that for landlords looking to remortgage, a five-year deal could prove to be a good choice in the long run.  

Of course, investors should always carefully consider the pros and cons of committing to a long-term deal, but for those looking for the peace of mind that comes with knowing exactly how much they’ll be paying each month, now could be the perfect time to make the most of a wide range of options and low rates whilst they last. 

Meanwhile, more landlords with existing portfolios have been filling the void and increasing their investment property numbers.  

But why is this happening and what can brokers to prepare for more complex buy-to-let (BTL) cases? 

There are more than 2.65m landlords in the UK, excluding owners renting out furnished holiday lets, according to HMRC. The number has increased significantly compared to 2007 when there were less than one million landlords. 

The English Private Landlord Survey 2018, commissioned by the government, found that 45 per cent of landlords owned one rental property, representing 21 per cent of tenancies. A further 38 per cent had between two and four rental properties, accounting for 31 per cent of tenancies. The other 17 per cent of landlords owned five or more properties, which is almost half (48 per cent) of tenancies. 

It’s difficult to find accurate, up-to-date information on how many properties landlords own but research firm Statista has data for the first quarter of 2021. It says most private landlords (42 per cent) had between two and four properties, 28 per cent owned between five and 10 and 15 per cent of landlords had one property. At the other end of the scale seven per cent owned 11-19 properties and another seven per cent had 20 or more. 

If we go back to 2016, research conducted on behalf of the Council of Mortgage Lenders (CML) found that 62 per cent of landlords owned one rented property. Just seven per cent owned more than five properties but they covered 38 per cent of the rental housing stock.  

Although these three pieces of research cannot be compared like for like they do indicate that the number of landlords owning one rental property over the past five years has been in decline – 62 per cent in 2016, 45 per cent in 2018 and 15 per cent in 2021.  

Why are there fewer landlords with one property? 

There are a number of reasons for this decrease which stem back to 2016. The chancellor back then was George Osbourne who made some significant changes for landlords, mainly involving tax, which inevitably put some people off. There was the additional three per cent stamp duty surcharge, tapered removal of mortgage tax relief and scrapping of the 10 per cent wear and tear allowance. 

Then the Bank of England tightened affordability rules by introducing the 5.5 per cent stress test and minimum 125 per cent income coverage ratio for BTL mortgages. There are lots of other rules landlords must be aware of so for some it has just got too complicated and they sold up. But in their place is the rise of the professional and semi-professional landlord. 

Big rise in the number of BTL limited companies 

Only three per cent of landlords in the CML’s 2016 survey used a limited company status but the tax rules have changed that. The estate agent Hamptons International said that more companies were set up to hold buy-to-let properties between the start of 2016 and the end of 2020 than in the preceding 50 years combined.  

In 2020, buy-to-let incorporations were the second most common type of company founded, after firms selling goods online or by mail order. There were 41,700 new companies formed to hold properties in 2020 – a 23 per cent rise from 2019 – and by the end of 2020 a record 228,743 buy-to-let companies were listed. 

The Bank of England also brought in new rules in 2016 for landlords owning four or more properties and created the portfolio landlord, adding more complexity for landlords, lenders and brokers. 

What can brokers do if faced with complex BTL cases? 

If brokers are used to only dealing with vanilla BTL cases, they might be unsure of where to turn if a complex case such as a portfolio landlord comes along.

Brokers should reach out to specialist lenders who will be able to help and offer support through the application process.   

Specialist lenders have the ability to be flexible and work around might seem like impossible cases. But the main thing for brokers to be aware of is that if we can help, we will. 

Various research surveys ask this question of existing landlords and, whatever the results returned, they tend to be used to force a narrative which suggests the market is seeing large numbers of exits. 

Of course, landlords sell properties all the time, and it’s fair to say that relatively recent regulatory and taxation measures have potentially forced the hand of those landlords who might otherwise have hung on to a property for longer. 

But, for the most part these tend to be landlords who only own one property, and what the surveys can’t judge is the number of new landlords and property investors coming to market all the time. 

I’m often asked to look into a crystal ball that doesn’t exist to give my view on the ‘future of the sector’ and how it’s going to handle this ‘mass exodus’ of existing landlords. 

Continued stream of investors 

The fact that I’m incredibly bullish about the future of buy-to-let, is much to do with the fact I can point to a significant influx of new landlords to the market. I know because Fleet Mortgages is providing those landlord borrowers with mortgages all the time and we continue to see new ‘first-time landlords’ every single month. 

There are other reasons for my confidence, and it comes from the type of individual who is investing in buy-to-let properties for the first time. There’s no disputing that new landlords tend to be much more savvy about investing than those that are exiting. 

After all, why wouldn’t you be?  

You will know full well that mortgage interest tax relief has been dropped to a minimum level, you will know of the extra three per cent stamp duty surcharge, and you will also know exactly what is going to be required from a property in order to keep it profitable in terms of ongoing rental return and yield, as well as the potential for capital increases. 

Otherwise, you’re unlikely to be investing in property at all. And these individuals are using limited companies because they’re aware of the tax advantages, and they are also not putting all their eggs in the property basket, because they tend to come armed with investments in other areas, stocks and shares ISAs, strong pension contributions and the like. 

These are not investment novices by any stretch of the imagination and they are recognising that investing in property over the long-term can also help meet their retirement needs or whatever they wish to do with those properties later in life. 

Making room for professionalism 

So, when I see those surveys about ‘countless’ landlords leaving, I tend to think the number is overblown, and that we do have a more focused landlord community who understand the ‘new normal’ for buy-to-let, and still see the value in that investment. 

Whereas many of those leaving have been ‘amateur’ players, who let out a property they couldn’t sell, or were left a property to look after and couldn’t think what else to do with it or became landlords by default rather than design. 

Of course, new blood is vital within the private rented sector, as is new property. There is still a shortage of both but the allure of property investment has not changed, it has only intensified and that spells good news for both advisers active in this space and the buy-to-let sector in general. 

The 53 per cent of intermediaries with expectations of growth surveyed from April to June was up on the 50 per cent saying the same in January to March.

The proportion of brokers anticipating a decline in BTL business stayed constant at 10 per cent quarter-on-quarter. 

Brokers further reported good levels of ongoing demand for BTL lending during the quarter itself, with 42 per cent citing “strong” and eight per cent reporting “very strong” demand.

Some 10 per cent of brokers said BTL demand was “weak” over the three months, compared to 30 per cent in Q2 last year.

Confidence about the forward-looking business outlook ran at 91 per cent for all brokers and 97 per cent for those with high levels of BTL activity.

Paragon Mortgages director of sales Moray Hulme (pictured), said strong business levels over the past nine months suggested that demand was driven by “fundamental shifts in where and how people want to live,” rather than by the stamp duty holiday fillip. 

“Brokers enter H2 2021 in a confident, robust mood. We expect business levels to moderate as the tax holiday ends, but landlords are seeing plenty of opportunities to expand their portfolios to meet excellent levels of tenant demand and changes in the type of property people now want to rent,” he said.

“There has been growth in tenant demand for family homes, for example, and landlords are acting accordingly,” Hulme added.