What do Osborne’s latest announcements on buy-to-let mean for Landbay? An Open Letter from Landbay CEO John Goodall.
Firstly, what are the changes that have been announced?
1. In July the Chancellor announced that individuals would no longer get higher rate tax relief (40%) on buy-to-let mortgage interest. They will still get basic tax relief (20%). This is to be phased in over the next four years and does not apply to properties that are held within a company.
2. In November the Chancellor announced that purchases of second homes (including buy-to-let) would incur an additional 3% stamp duty tax. Ironically, this cost can be netted off as a cost against income tax at the full 40%.
3. Mark Carney, Governor of the Bank of England has said that he will monitor buy-to-let lending practices to ensure that it doesn’t create a house price bubble.
1. This change will ensure that a far greater degree of buy-to-let landlords hold their portfolios in limited companies. While there is no data on this segment, it is likely to be around 20% and to grow to c. 40% over the next 5-6 years. So, while buy-to-let mortgage lending is predicted to grow at 5-10% per year, broadly just above house prices, the segment that we and other non-bank lenders specialise in will grow at 25-35% following these changes. Banks do not have the systems and expertise to do this type of lending it would take them several years for them to change their tack to this if they were to start. This presents a key opportunity for lending platforms like Landbay.
2. There are already significant costs attached to a property purchase. Stamp duty is often added to the loan amount and most landlords will hold properties for 7-8 years. Therefore, when spread over 7-8 years, the 3% as a one off payment will not have a material impact on the economics of a well-run BTL portfolio, particularly in an environment of rising rental prices. If it does deter less experienced or committed BTL landlords from purchasing properties, this will only restrict supply further and push up rental prices, therefore improving the economics of a buy-to-let company. In addition, 60% of the mortgage market is re-mortgaging – and so it won’t impact that side of the market.
The Government is keen to professionalise the buy-to-let market and it has used these two policies to do so. For Landbay this movement is positive.
3. The Governor of the Bank of England has also had his say in the matter. He is generally concerned by mortgage lending with inadequate rental coverage, particularly below 125%. We agree with Governor Carney that lending with low rental coverage can be risky and it is not something that we would expose our lenders on Landbay to. We believe that every mortgage lender should focus on what could happen if/when the economy worsens and that is why we have strongly believe in open stress testing. Further, stress testing potential mortgage applicants against rising interest rates, falling rents, rental voids and falling house prices is central to our underwriting processes. The average LTV of a Landbay mortgage is 67% and the average rental coverage (rent payment/mortgage payment) is 172.2% (December 2015).
It is also worth noting that buy-to-let mortgage lending is currently c. 25% (maybe nearer 20% as currently the yoy estimate is around £36,200m) below pre-crisis levels and that most BTL lenders’ loan books performed very well throughout the credit crisis – typically outperforming owner occupied which are typically higher LTV (currently up to 95%).
Our Landbay Rental Index shows that rents have been rising consistently on year-on-year basis since January 2013 – up 7% in this time and in fact 2008 is the only year in which rents have fallen over the past 20 years. This is driven by increased employment, rising average wages and increased migration.
In addition, the cost of housing in the UK is high and therefore younger people are renting for longer. As much as the Government is incentivising home ownership in favour of renting, the private rented sector will remain a vital part of the solution to the UK’s housing crisis as demand for rented accommodation increases at a significantly faster pace than supply.
Rent rises coincide with the so-called ‘boom’ in buy-to-let lending – which is actually a recovery given the extent to which buy-to-let dipped during the recession.
In summary, the fundamental demand for rental accommodation is strong and this is what makes buy-to-let so resilient both now and in the future.
The information contained in this report should not be used by consumers to make financial decisions. Consumers have a range of different financial needs and requirements and as such should always seek independent professional financial advice before making an investment decision.