New investment in the buy-to-let market has fallen by £20bn in two years as the lethal combination of tighter tax and mortgage rules has begun to take its toll on landlords.
Figures released yesterday by IMLA, the mortgage broker trade body, show that the value of new money raised to invest in buy-to-let properties has fallen by 80pc, from £25bn in 2015 to just £5bn in 2017.
In that period, a series of reforms have had a punitive effect on landlords. The stamp duty surcharge on additional properties was introduced in 2016, making expanding a portfolio more expensive, and the phased removal of mortgage interest relief which began last year has also squeezed profits.
Meanwhile some landlords now face an uphill battle getting mortgages at all, thanks to changes to lending restrictions ushered in by the Prudential Regulation Authority, a part of the Bank of England, at the tail end of last year.
There are currently 4.5 million people living in the private-rented sector and, IMLA warned that if demand continues to increase at current rates the crackdown on landlords may force average rents upwards.
Aaron Strutt, of mortgage brokers Trinity Specialist Finance, said he had experienced a dramatic fall in interest from buy-to-let investors. While enquiries from landlords used to make up about 40pc of his business, this has dwindled to about 20pc.
“We don’t get as many emails as we did asking about buy-to-let,” he said. “We get a lot more interest from first-time buyers.”
He added that as the market has slowed, lenders have cut their rates on buy-to-let mortgages, which are typically more expensive than residential, in a bid to entice more landlords into the sector.
Last month, Natwest reduced some of its buy-to-let fixed mortgage rates by 0.6pc, Hinckley & Rugby Building Society discounted its variable rate by 0.4pc, while Platform reduced its buy-to-let rate by 0.2pc.
The buy-to-let lending squeeze
The first blow to landlords’ bottom lines were the myriad changes to the taxation system, now new lending restrictions threaten to squeeze further.
Calculations by John Charcol, the mortgage broker, suggest that an average landlord may be able to borrow £30,000 less per property under the new affordability regime.
Before the changes, most lenders required a landlord’s rental income to cover 125pc of the mortgage payment, assuming a rental yield of 5pc, which the mortgage would be "stress tested" against. This means a landlord of a property worth £200,000 with monthly rental income of £800 would be able to borrow £153,600 when remortgaging – roughly 75pc of the property’s value.
Nick Morrey, from John Charcol, said this meant the vast majority of borrowers would “fly through” the remortgaging process.
The new rules mean most lenders require rental income to cover 145pc of the mortgage payments, and the assumed yield is 5.5pc. The same landlord would now only be able to borrow £120,376, according to the John Charcol calculations, or a “loan-to-value” of around 60pc.
Mr Morrey said this would limit options for many.
"A lot of the market is made up of accidental landlords, those who have a bit of spare cash and think I'll invest in property. I think lots of them will see everything that's going on and think, actually I don't want to be a part of that," he said.
To make matters worse "portfolio landlords" – those who have four or more properties – now face far greater scrutiny when refinancing. Lenders will expect their entire portfolio to satisfy the criteria, meaning a good deal more paperwork for those with very large property holdings and a greater chance of rejection.
Mark Harris of SPF Private Clients, the brokers, said: “What we will begin to see is landlords go for longer fixed-rate mortgages and buying in areas where they will get a very high yield. So they will look less in places like London where prices are higher and focus more on high-yielding areas, such as the north-east.”
Is anyone unaffected?
There is relief for some in that the lending criteria doesn’t apply to those who hold their property in a limited company or to basic-rate taxpayers, with both only required to cover 125pc of their mortgage payments with rental income.
Basic-rate taxpayers need not worry about the changes. A limited company structure is also attractive as the stamp duty surcharge and changes to tax relief on mortgage interest will not apply either.
New landlords are likely to want to set up this way, despite the associated costs, while some smaller-scale buy-to-let investors may consider transferring their portfolio. Experts warn this could be very expensive, however, as there would be stamp duty and capital gains tax liabilities.
For higher-rate taxpayers, some lenders will take personal income outside of the buy-to-let property into account, which could boost the amount you can borrow.
Fix for longer
Another option for those looking to sidestep the rules could be to try to fix for a longer period. Currently, the majority of landlords take out fixed-rate mortgages for two years, but the new criteria may prompt some to fix for longer.
Mr Morrey said that, as a longer fix represents less of a risk, most lenders will make their calculations based on rental payments covering 145pc of the mortgage payments but stress testing at the rate you will pay rather than 5.5pc.
Mr Morrey said he expects to see more landlords seeking five-year fixed-rate deals to take advantage of this loophole.
Fixing the portfolio problem
Short of selling your portfolio or transferring it to a limited company (with all the associated costs) there is little you can do to escape being labelled a portfolio landlord and assessed as such.
However, Mr Morrey said those at the margins could alter their ownership arrangements. Only properties with mortgage debt count towards your portfolio in terms of the lending requirements.
This means someone with five mortgaged properties, for example, could sell one and use the proceeds to clear the mortgage on another. This would bring their number of mortgaged properties down to three, and they would no longer be classed as a portfolio landlord.
Mr Morrey said: “This means lenders would no longer need to assess their entire portfolio for viability.”