The BTL sector has taken a bit of a pounding over the last couple of years, as authorities introduced a number of harsh measures to counter fears of “financial stability risks” posed by growth in lending, with concerns that future financial tightening could lead to a surge in landlords looking to exit the market should they become stressed, and subsequently cause a house price crash. The measures included:
- 3% extra stamp duty on any second or subsequent property from April 2016
An increase in the minimum stressed interest rate to 5.5% for all new loans with a fixed rate period of less than 5 years
- Compounded by a rise in the Interest Coverage Ratio required at that higher rate to 125% or up to 145% for higher rate taxpayers on regulated loans
Higher rate tax relief for so called ‘amateur’ landlords (those with 3 properties or less) to be phased out between 2017-2020
- Plus a new tax credit system which may also push some basic-rate tax payers into the higher tax bracket
- New specialist underwriting rules for lending to professional landlords
- From April, rental properties will be subject to new Minimum Energy Efficiency Standards
Taken as a whole, the measures are potentially a big incentive for landlords to consider exiting the market. Looking at the slowdown in house price growth, especially in London which is natural centre for BTL, there’s no doubt that they have had an effect. It could even be suggested that these measures might actually cause the very problem they were designed to avoid; the BoE said last year in a poll that about one third of landlords had considered selling up!
However, it’s also just as likely that landlords will simply look to increase rents in order to cover the extra costs they now face and, despite the recent base-rate increase, financing terms have become more and more competitive and borrowing remains historically cheap, helped by lower funding costs for lenders in securitisation markets.
Moreover, lending quality remains strong with robust underwriting criteria underpinned by some of the new more draconian measures mentioned above, and asset performance of BTL mortgage portfolios has been exceptionally strong (more of that in a future blog). Rental demand also remains strong and therefore, as long as being a landlord doesn’t become a loss-making exercise, most will likely hold on to their properties. Furthermore, professional landlords may even be able to take advantage of any property price softness by adding to their portfolios to increase yield.
Brexit brings its own uncertainties, and some landlords may be waiting to see how that pans out before making any decisions, but on balance whilst there has certainly been some bumps in the road to negotiate, the consistent growth of the BTL mortgage market indicates that this market in the UK looks on course for further generally positive and steady performance in 2018.