We know the buy to let market is changing and for some, it might feel like the industry is being attacked. There is no doubt the changes will have a big impact on those with mortgages, but the question is why have these changes been made?
The but to let market; changes for a greater good?
Is the government trying to manipulate the market to help spread the wealth distribution among the generations?
The reality of the changes won’t be noticed by the majority of buy to let landlords with mortgages until it's too late. A small percentage of investors are of course clued up and are positioning themselves accordingly. But as we know people often react to events rather than plan in advance, so over the next few years, I think the market will really see some fundamental changes, once the average Joe investor realizes all that glitters is not gold. Of course, by then it will be too late as they will probably have a shock when the time comes to pay their tax bill.
The result will undoubtedly be more people deciding that buy to let is just not for them and they will start to offload their properties onto the market. Of course this usually leads to a herd mentality when the fear of not following the crowd has a perpetuating effect.
So we know what is likely to happen, and for the contrarian investor it might be an opportunity to be brave and not follow the crowd. As I have previously said there are still huge opportunities for the smart investor, but the market is moving away from the casual investor and that’s a fact.
As we know its very easy to outline what is happening but if we want to dig deeper to try and work out why, then these are my initial thoughts.
Is the government trying to manipulate the market to help spread the wealth distribution among the generations? We know the distribution of wealth hasn’t been even and for the first time the next generation will be poorer than their parents.
Expect to see the buy to let market change over the course of the next few years.
It wasn't long ago that every man and his dog were jumping on board the buy to let market.
It was an easy win; house price inflation and good rental returns. People were making huge profits by not doing much.
However as we know the gravy train doesn’t last forever, and if you haven’t already, its time you take action. So whats changed?,
Buy to let property market recent history:
Buy to let market: April 2016 stamp duty changes
Prior to April 2016, stamp duty was paid as a flat percentage on any property worth at least £125,000.
Then after this date a huge thing happened!
Anyone buying a property which wasn’t their main residence now faced an additional 3% tax on top of the standard stamp duty rates. In other words:
Up to £125,000 the tax was 0% and is now 3%
£125,001 – £250,000 the tax was 2% and is now 5%
£250,001 – £925,000 the tax was 5% and is now 8%
Buy to let market: April 2016 wear and tear allowance
A deduction of 10% from profits was previously allowed as “wear and tear allowance”. But the new changes have meant that landlords can only claim back the costs they have actually incurred to replace furnishings, appliances and kitchenware.
Result = More tax!
Buy to let market: January 2017 Prudential Regulation Authority (PRA) affordability standards
Since the beginning of 2017 lenders have had to take a more holistic approach of assessing landlords. They now take into account any tax liability, including tax relief and all property-related costs, when assessing affordability for buy to let mortgages.
Result = Harder to get finance.
Buy to let market: April 2017 Mortgage interest tax relief
Then in April 2017 buy to let landlords were hit with another blow; previously they could deduct all of their mortgage interest from profits which meant they could reduce their tax liability.
The effect of these changes hasn’t been fully felt yet as it's being gradually implemented and probably lots of landlords aren’t fully aware of this bombshell!
Result = More tax!
Buy to let market: September 2017 Portfolio lending
Landlords with four or more mortgaged rental properties will be known as portfolio landlords
A regulatory change has meant that landlords with four or more mortgaged rental properties will be known as “portfolio landlords” and mortgage lenders have to adjust the way they underwrite these cases.
The result is we are likely to see some lenders stop accepting buy-to-let applications from portfolio landlords, while others will embrace the changes.
Result = More expertise required.
Buy to Let Solutions:
Ltd company structures for buy to lets.
Anyone buying a new property should consider this...
There can be issues with legacy properties but anyone buying a new property should consider this.
Because everyone’s tax position is very different, it is always advisable to seek tax advice before deciding to go down the Ltd company route. However, for those that do, the tax benefits can be very appealing, compared to just getting a mortgage in your own name.
Diversify into new property investment markets
There are investment properties that are not being hit as hard. Holiday lets is one of these but you need to get a holiday let mortgage.
You might also want to explore commercial property, development, or just stay in the buy to let market but maximize your return by exploring HMO property options.
Remember if you keep your existing assets but change the business model (buy to let to holiday let or HMO), make sure if you have a mortgage then you either get permission from your existing lender or change lenders. This is really important as we have heard stories of people getting caught out and then the lenders calling in their loans.
...if you have a mortgage then you either get permission from your existing lender or change lenders...
Consider investment properties with better returns
Think about how you could maximize your return on your investment.
There are many different types of investment property such as HMOs and semi-commercial property i.e. shops with flats above.
Like I said above, it might be sensible to think about how you could maximise your return on your investment. Could the property make a better return if you appeal to a new market. You might need to spend some money to convert or do something else, but don’t worry there are finance options out there that can help.
Advantage of working with a mortgage broker
If I could give anyone my biggest tip, it’s to build a good relationship with a reputable mortgage broker (even if it’s not us). And I speak for all (regulated) brokers out there, the biggest advantage of working with an independent mortgage broker is they are always tuned into what is happening in the market place and are the best people to help advise you of your options. And because they are regulated they will have TCF (Treating customers fairly) procedures built into their working model.
Also...remember a particular lender maybe the flavor of the month now, but things change...and you won't know...we do!
You might think you know best, but if its okay to be honest…you don’t.
If you have a question…get in touch.
Work with a mortgage broker who is regulated:
Because they are unregulated and some have never worked in a regulated environment, there are lots of cowboys...and this matters.
A word of caution; the investment property world is becoming more commercially orientated. And there are brokers who solely work in this unregulated environment (anything not residential, non regulated buy to let and commercial).
Because they are unregulated and some have never worked in a regulated environment, there are lots of cowboys…and this matters. I’ll write another blog or do a video on my Youtube channel or Facebook to share this with you soon, or feel free to reach out to me and ask.
At Barr Financial we are regulated with the FCA and we care deeply about our clients. We are not here for a one night stand!
Is the buy to let market all doom and gloom?
Its no longer going to work for the casual investor...
The short answer is ‘yes’ and ‘no’ depending on you!
For those who adapt and want to put the work in, there will be opportunities and steps you can take. But you have to be committed to being in the property investment game.
It's no longer going to work for the casual investor, and if that’s you, you might be best served to sell now, before everyone else does!
The good news for those who are committed, is (strangely) that it’s getting harder!
It means fewer people will be bothered and there will be more opportunities for those who want it. Of course, you will have to think of different strategies, markets, and solutions, but that’s where working with a professional team will really help.