Buy-to-let has been a hot topic recently with the concern that UK landlords (both individual and commercial like First Urban ) will face tougher lending conditions on top of tax relief changes that are scheduled to come into force next year.
So just how tough is it going to get? Below are some of the key challenges landlords will face:
Higher stamp duty
According to This is Money, as of April 1 2016, landlords will face an additional 3% stamp duty above £125,000 for every additional property they purchase. Landlords with single property ownership will not be affected, however those who are looking to purchase an additional property (not replacing their existing residence) will be. The national average for a semi-detached house is currently £265,000 (Zoopla - June, 2016) which under the previous rules would attract a stamp duty of 5% - however, the proposed changes would see this increasing to 8% of the purchase price.
Mortgage interest tax relief
The current economic climate has offered buy-to-let landlords a great environment to invest their capital and make a return. Steadily increasing property values and a low interest rate environment has fuelled demand on a number of fronts, which has been great for landlords but it has stifled the current housing market, preventing first time buyers entering the market. One way in which the government has tried to cool-off the buy-to-let boom is by limiting the landlord’s ability to offset mortgage interest costs when calculating their tax bill.
Banks and building societies are now restricting higher loan to value ratios (LTVs) which means the landlord will have to inject more of their own capital when purchasing an additional property. According to The Times, Nationwide is pulling out of lending to landlords where the loan is 80% LTV; offering a maximum loan-to-value ratio will more likely be in the region of 70-75%.
Affordability is a key area and one which banks are paying close attention to. Verification of monthly income and expenditure, source of funds (deposit) and closer integration into a landlord’s property management costs is even more important. So for the landlord, this could slow down the process for buying a property where even more checks are being undertaken.
Banks and building societies are required by the Regulatory Body to apply stress testing to their mortgage applications, to ensure in a worst case scenario the landlord is able to make their mortgage repayments. This is for a very sensible reason but could mean certain landlords may fall short of lending criteria. Stressed tests could be applied in the form of increased interest rates (e.g. can the borrower still meet mortgage repayments or cover interest rate costs at 6%).
What does this mean?
While there are significant headwinds for landlords in this current climate, it does remain a market with opportunity, return and will continue to be a strong investment opportunity. Some landlords may feel they are heavily restricted by these changes but these changes are also there to protect landlords against taking excessive risks for what is becoming a heated market place.