Emergency measures

As everyone in the UK is adjusting to the societal changes being imposed on citizens due to COVID-19, landlords will also be considering the financial impact on their buy-to-let businesses. The Government has announced emergency legislation providing protection for renters meaning landlords cannot start eviction proceedings for at least a three-month period during the national crisis. These measures are designed to protect tenants who are struggling to pay their rent and prevent people from becoming homeless during this unsettling time.

There is also protection for landlords whereby lenders may offer a three-month mortgage holiday for landlords whose tenants are experiencing financial difficulties as a result of the coronavirus. The measure will be welcomed by landlord organisations such as the NLA and RLA who have asked the Government to be supportive of landlords. However, there doesn’t appear to be any specific help for landlords who don’t have mortgages but may also suffer financially during this period.

The NLA and RLA also issued a joint statement encouraging landlords to be supportive towards their tenants: “Landlords should be as flexible as they can to help tenants facing payment difficulties resulting from the impact of the coronavirus.”

The coronavirus crisis coincides with the final removal of mortgage interest tax relief for landlords which has been phased out in stages since 2016. This has impacted higher rate taxpayers most of all and may push previous basic rate tax payers into the 40 per cent banding. No doubt all landlords are concerned about the financial consequences of coronavirus over the coming months.

Section 21 and removal of ASTs

Since last year, UK landlords have been campaigning against the abolition of Section 21 which currently allows landlords to apply through the courts for a no-fault eviction should they wish to take possession of their property for any reason. Section 21 is still expected to be scrapped although the exact timeline is unclear, but it will leave landlords only able to end a tenancy where they can prove they have legitimate grounds under Section 8 of the Housing Act. A Section 8 claim involves a formal court hearing and the median time for this process to complete is 16 weeks, so landlords are asking for legal proceedings through the courts to become more efficient.

In tandem with abolishing section 21, the Government is also planning to remove the Assured Shorthold Tenancy (AST) which would mean that assured tenancies are the only type of tenancy available to landlords. At buy-to-let finance meetings with landlord groups around the UK that we have attended, landlords have been asking how the removal of ASTs will impact buy-to-let lending criteria? So far there has been little indication from lenders as to how they will react to this change in the rental sector, but it would be good to have an idea.

Portfolio landlords

Although the various changes in the buy-to-let sector over the last 5 years have resulted in some landlords selling up, there has been little sign of larger portfolio landlords looking to exit the market in significant numbers. A recent survey by Moore, the accountants, shows that the number of landlords with a portfolio of 10 or more properties has remained constant over the last couple of years at around 43,000. This seems to show the underlying strength of the PRS in the UK and indicates that many buy-to-let investors look at it as a long-term prospect.

Larger professional landlords may be better able to adapt to changing circumstances with a more diverse portfolio and look at other options for higher yielding properties, such a HMOs or multi-unit blocks. They may also look at geographic regions further afield to take advantage of better performing areas of rental accommodation.

Certainly, at our business we are experiencing a continuing demand for more specialist mortgage products that are aimed at complex property scenarios and professional landlords with expanding portfolios. The experienced buy-to-let investors we talk to are often surprised that more lenders don’t provide mortgages to larger portfolio landlords as they perceive themselves to be a better risk than someone with 3 or less properties and are often irked if they have to pay higher rates.

Looking ahead

It is difficult to look too far ahead as we are all currently experiencing unprecedented events and it is unclear how long emergency measures will be in place in UK. However, it is also an opportunity for showing solidarity and support for each other, including the landlord community.

There has been a swathe of tax and regulatory changes impacting on the buy-to-let sector in recent years which may have affected the perception of residential rental property and its viability as an investment option. Consequently, the sector has seen a reduction in the number of amateur landlords and it is now primarily the domain of professional property investors. However, there are still people entering the market and looking to make their first buy-to-let purchases – a group referred to as ‘first time landlords’.

Most lenders on our panel will accept applications from first time landlords providing they are currently an owner occupier, so there are plenty of product options in the marketplace. There is often a requirement that applicants have owned their residential home for a minimum length of time which may vary from 6 to 12 months, although some lenders do not state a minimum period providing the applicant’s name is on the title deeds.

It is not quite as straightforward for first time buyers - those with no existing UK property at all. We currently have around fifteen lenders on panel who will consider applicants without a history of property ownership such as Barclays, Landbay, Precise and Vida Homeloans. Some lenders will apply an affordability calculation alongside their normal rental stress tests and criteria, which depending on income multiples may limit the amount applicants can borrow.

There are also options for first time buyers to be the second applicant on a buy-to-let mortgage and it is a familiar scenario when parents help their children onto the property ladder in this way. Lenders who consider this include Interbay, Leeds Building Society and Paragon.

In recent years, we have seen a significant increase in the number of limited company applications, especially since the phasing out of mortgage interest tax relief for buy-to-let properties. We have also seen first time landlords setting up an SPV for their initial property purchases, which is definitely an option worth considering as it may provide financial benefits depending on individual circumstances. It is always recommended to seek professional tax advice before deciding about this option.

It is simple and inexpensive to set up an SPV, but it is important to register the company with an appropriate SIC code relating to the letting and management of property. Most lenders will accept brand new SPVs with no accounts history, but they will require personal guarantees from the directors/shareholders. There are also lenders that accept companies that trade in non-property related businesses, although the product options for this scenario are fewer.

A significant advantage of using a corporate entity when applying for a buy-to-let mortgage is that they are not affected by the recent tax relief changes or the 2017 PRA regulations relating to rent stress tests. Lenders normally apply a less stringent rental calculation for limited companies, typically at around 125 per cent at 5.5 per cent which may increase maximum borrowing levels for new landlords.

Those investing in buy-to-let property should give proper consideration to property type, tenant demand, location and rental income. These variables can have a significant effect on the overall profitability of an investment and prospective landlords will surely benefit from thorough research. For example, we get frequent enquiries about HMOs and multi-unit properties which often give a better than average rental yield due to multiple rents being charged.

Unfortunately for first time landlords most of the specialist lenders who finance HMOs and multi-unit properties require a minimum amount of previous experience as a landlord. For example, Vida Homeloans requires 12 months’ experience and Paragon Mortgages requires 3 years. However, there are a few options such as Masthaven, Kent Reliance and Together who will consider this scenario for first time landlords.

To conclude, there are plenty of investment opportunities for first time landlords and a wide range of buy-to-let mortgage products to choose from. By considering the different factors that may affect the level of finance available and overall returns on a property, new landlords can make more informed choices during their first buy-to-let investment experience.