Specialist Landlord insurer Just Landlords recently asked us to highlight the main changes to the property investment landscape that landlords need to be aware of. We wanted to highlight what we feel are the top seven at the moment. The article originally appeared on Just Landlords website.
By Karl Griggs, Director, CPC Finance
The buy-to-let industry has seen a busy year so far, with changes that will impact both how landlords run their business and that business’ profitability. With that in mind, here are some of the key changes that property investors should be aware of.
1. March 2016: Improved second charge mortgage rules introduced
Since the introduction of the Mortgage Credit Directive, second charge mortgages are now regulated in the same way as first charge homeowner mortgages – this gives them the same FCA protection and means lenders and brokers must have the appropriate permissions, bringing more peace of mind for the borrower. Second charge loans can be a way for property investors to raise finance from a property (including for or on a buy-to-let property) without remortgaging.
2. March 2016: New rules for consumer landlords
The Mortgage Credit Directive also brought in new rules intended to differentiate between “consumer” and “commercial” landlords. “Consumer” landlords are those who have not bought a property with the intention of running it as a buy-to-let business. For example they might have inherited a house and decide to rent it out to pay for maintenance. The new “consumer” category of landlords will need a regulated mortgage rather than a normal commercial buy-to-let mortgage, giving them an additional level of protection as they are not a business.
3. 1st April 2016: 3% more Stamp Duty for property investors
Since 1st April 2016, anyone who buys additional property, including buy-to-lets and second homes worth more than £40,000, has to pay an extra 3% of the purchase price in stamp duty. This does not apply to land, commercial or semi commercial units, only to residential purchases in personal names or as a limited company.
For example, anyone who bought a £250,000 second home or buy-to-let before April paid stamp duty of £2,500. This was based on paying 0% on the first £125,000 of the property value and 2% on the portion between £125,001 and £250,000. But since April, landlords have to pay 3% for the first £125,000 and 5% instead of 2% on the amount between £125,001 and £250,000, meaning that they have to pay £10,000 in total. For a full breakdown of the different bands, see our “Guide for landlords on stamp duty changes”.
4. 1st April 2016: Energy efficiency measures
Since 1st April, in England and Wales, landlords must consent to any reasonable request from a tenant to make energy efficiency improvements at a privately rented property. A reasonable request is one that can be granted at no cost to the landlord and submitted in writing. This could be through government funding, by the tenant paying, or a combination of the two. You can find the full process for requesting improvements on The Guild of Landlords website. The regulations also demand that landlords raise EPC rankings of private rented homes to an E by 2018. If they fail to meet this requirement, the home will not be able to be rented out.
5. April 2016: Wear and tear changes
Since the beginning of April the Wear and Tear Allowance provisions for rental properties have been removed, replaced by a deduction for the replacement of furnishings in privately rented accommodation. This includes replacing furniture, furnishings, appliances (including white goods) and kitchenware. This does not apply to holiday lets. The amount of the deduction is the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent) plus the incidental costs of disposing of the old item, or acquiring the replacement, less any amounts received on disposal of the old item.
6. September – Stricter buy-to-let underwriting rules
In March the Bank of England’s Prudential Regulation Authority (PRA) proposed in a consultation that lenders should be stricter in their buy-to-let underwriting decisions. The consultation ended in June and at the end of September the PRA published its final rules. The PRA is proposing that all lenders use an affordability test when assessing a buy-to-let mortgage application, either in the form of an interest coverage ratio (ICR) or income affordability test. Currently most lenders work to the rule that rent must cover 125% of the interest payments, taking into account any likely future interest rate rises. The PRA does not expect its proposals to reduce minimum ICR thresholds and may in fact lead to higher minimum ICR thresholds. Where personal income is being used to support the rent, an income affordability test will be used to assess whether that income, in addition to any income from the property, is enough to support the mortgage payments. These new rules apply whether the applicant is an individual or limited company.
7. From 2017 – Tax changes on buy-to-let mortgages
Between April 2017 and 2020, tax relief will be gradually cut on buy-to-let mortgages from 40-45 per cent at the moment to 20 per cent for all individuals by April 2020. This will not affect basic rate tax payers, but it will reduce profit on the portfolios of higher rate tax payers and those basic rate tax payers whose rental income pushes them into a higher bracket. This should be a consideration for all landlords when evaluating their portfolios.
Although the present landscape is changeable, there remains considerable potential in the buy-to-let market for investors. The new regulations may mean that landlords need to adjust their business models slightly but consulting with experts will mean that they manoeuver this new environment successfully.