Here you can find all the latest news and updates from NLA Mortgages.
As the end of the financial year approaches, buy-to-let investors will be mindful that mortgage interest tax relief will be phased out completely in April. The effects of this tax change have been implemented in stages over the last three years, giving landlords the chance to plan and adapt to its financial consequences.
The significant rise in limited company buy-to-let mortgages is a clear indicator that many landlords are considering the tax advantages of using a corporate structure for their property investment businesses. Around 35 per cent of our applications are currently for limited companies and we are frequently asked by landlords whether or not it is a good option for them.
This is not a question we can readily answer as the financial implications of using a limited company will vary depending on individual circumstances and portfolio size. We always recommend seeking tax advice, but we can also provide information that could assist in the decision-making process. For example, if a landlord client is seriously weighing up the benefits of setting up an SPV, providing mortgage illustrations for both personal name and limited company products could help calculate the overall cost savings involved.
Historically, limited company finance has tended to be more expensive than personal name finance although the gap is narrowing, and some lenders no longer distinguish between the two applicant types. In any case, it can be useful for landlords to be able to compare potential monthly repayments when deciding which route to take. Our online mortgage finder has a simple built-in filter for limited company products enabling visitors to obtain comparable mortgage illustrations without entering a complete fact find.
(NLA Landlords Tax course link - https://landlords.org.uk/landlord-tax)
It is difficult to predict what effect the current political and economic climate will have on interest rates in 2020 as Mark Carney prepares for his departure from the Bank of England and Andrew Bailey gets ready to step in.
It has also been predicted by industry pundits that the buy-to-let remortgage market will slow in 2020 as more landlords are choosing 5-year fixed rates which lengthens the remortgage cycle. However, mortgage rates are still very low and now could be a good time for landlords to examine their whole portfolio to make the most of these deals.
If landlords start to feel more confident about the UK economy in the coming months and are considering expanding their portfolios, releasing equity from existing properties is a popular way of providing a deposit for a new property purchase. There are plenty of options to choose from for all property types and situations, including many that come with incentives such as a free valuation and free legal fees.
For clients looking for a like-for-like remortgage, switching lender is not the only way to secure a lower rate. There is now a growing number of lenders who offer retention products to existing customers which can provide a quick and easy way to refinance.
It is expected that gross buy-to-let lending in 2019 will be recorded at around £37 billion but what are the prospects for this sector in 2020?
Some industry pundits have suggested that buy-to-let lending may fall slightly during the coming twelve months as the relatively buoyant remortgage market in 2019 begins to slow; more landlords are now choosing 5-year fixed rates rather than shorter term products which is lengthening the remortgage cycle.
The trend for longer term fixes was stimulated by the 2017 PRA regulations impacting affordability assessments and rent stress tests. For our buy-to-let mortgage business, over fifty per cent of applications were for 5-year fixed rates in 2019.
The purchase market was sluggish in 2019, due in part to the reticence among professional landlords caused by the uncertainty surrounding Brexit. However, following the general election in December and the success of Boris Johnson’s ‘Let’s get Brexit done’ campaign, the path ahead seems clearer; we are definitely leaving the EU.
Now that the political furore of 2019 has abated, there may be a boost to the buy-to-let sector as portfolio landlords release a pent-up demand for new property investment and begin resurgence in the appetite for purchase finance.
It is certainly a good time to obtain buy-to-let finance as strong competition in the marketplace has led to prices being driven down, with rates currently below 1.50 per cent with some High Street lenders, but rates may have bottomed out.
There is still economic uncertainty in the UK as we endeavour to leave the EU in the best possible circumstances and until the new Governor of the Bank of England is in situ. Depending on Brexit developments and other socio-economic factors, there could be some movement in interest rates in the coming year, although a difficult thing to predict without a crystal ball.
What does seem clear is that lenders have a strong appetite for buy-to-let business and some have adapted their lending criteria to widen their appeal to landlords. For example, there are now more lenders offering buy-to-let finance for expats, limited companies, HMO landlords and AirBnB.
This trend is likely to continue in 2020 with lenders modifying their propositions as the demand for more specialist or ‘complex’ buy-to-let mortgages continues. Recently published figures from UK Finance for buy-to-let lending in 2018 indicated that specialist lenders recorded higher rates of growth compared to banks and building societies.
However, following the PRA regulations relating to ‘professional landlords’ (those with 4 or more mortgaged buy-to-let properties), there is still a divide between those lenders servicing large property portfolio investors and those opting to limit their offering to smaller scale landlords. This is likely to remain the case in 2020, with lenders deciding on their target market and honing their propositions accordingly.
Pretty shortly, the general election results will be known and there maybe a clearer picture of how Brexit is going to be delivered. Alternatively, there could be further delays and more confusion surrounding the final outcome for the UK.
Political party manifestos often contain starkly different promises on key issues and it’s probably safe to assume that the election winner will not deliver all of them. It is difficult to predict what effect there will be on the economy and whether any significant tax changes will be implemented in 2020.
Regardless of the party in power, the UK will probably still be a viable option for foreign property investors, especially if the weakened pound persists during the next phase of Brexit. The property market in Britain has always attracted overseas investment and is also a popular investment strategy for British expatriates living abroad.
We frequently receive enquiries for expat buy-to-let mortgages and over the last 12 months there has been an increase in the number of lenders and products available for UK citizens living overseas. In fact, we have over 20 buy-to-let providers on our lender panel offering financial solutions for expats.
Due to the myriad of options available, buy-to-let expat cases can be relatively straightforward to place. However, there are some key criteria points worth being aware of when arranging expat finance.
Although a rather obvious place to start, country of residence is an important factor when assessing the product options available. Most lenders will accept any EEA country, others will include any that are on the FAFT list, and some lenders publish a specific list indicating the countries they will or won’t lend to. It is quite surprising how many places in the world are acceptable residencies for expat applicants, however the majority of our expat clients live in the EU, USA, Hong Kong or Singapore.
Most lenders will require applicants to have a UK bank account and an existing property in the UK (either residential or buy-to-let). As some expats sell their residential property before moving abroad this can be a stumbling block, however there are a few lenders who will consider applicants without a UK property including Saffron Building Society and Skipton International.
Expat lenders usually have specific requirements around employment status, preferring applicants who work for a multi-national company with a higher minimum income threshold, for example, £40,000 for The Mortgage Lender or £50,000 for Interbay. Self-employment income requirements are sometimes higher still.
Minimum loan sizes can also be an issue with expat buy-to-let cases as the threshold is usually between £100,000 and £150,000 with most lenders. However, Saffron Building Society is one of our most popular expat lenders with a minimum loan size of £30,000, neither a minimum income requirement or any specific restrictions on country of residence.
Another competitive provider in the expat space is Foundation Home Loans offering some of the most attractive rates in the market, but they will only accept limited company applications. Keystone products are also priced keenly,and they will accept both personal name and limited company applications.
Our free online buy-to-let sourcing system has a built-in search filter for expat mortgages and is a useful tool for brokers to use when researching the market for the best expat deals. Although there is normally a premium to pay for expat finance, we have hundreds of options to choose from currently starting at 2.49 per cent.
Expat buy-to-let mortgages aren’t necessarily more difficult to arrange but asking the right questions at the outset can help save time.
The buy-to-let mortgage market has come under pressure in recent years due to the multitude of tax and regulatory changes aimed at the sector. However, lenders are demonstrating their willingness to support landlords with a strong appetite for business and a renewed sense of innovation from some providers.
There are more lenders and products available now than there has been in the last ten years and a healthy competition is playing out among them, which means that there are some excellent deals for buy-to-let clients.
Lenders are not just competing on price though. Some are looking at ways to meet more specific requirements that result from the varying demands of landlords. For example, there is a good choice of lenders who offer top-slicing, or rental top up, facilities to support applicants who may fall short of the more stringent rent stress tests in the current marketplace, but who can comfortably afford the monthly payments with surplus earned income.
There are now more than 10 lenders on the our lender panel who offer a top slicing facility, including the likes of Hinckley & Rugby Building Society, Axis Bank and Precise Mortgages. These schemes are targeted at landlords with surplus earned incomes to support their affordability assessment, however our most popular lenders are still those without any minimum income requirement such as Vida Homeloans, Foundation Home Loans and Zephyr Homeloans.
We are also seeing lenders launching special offers with unique schemes that sit outside of their normal product ranges. For example, Foundation Home Loans have recently released an early remortgage special for landlords looking to refinance within 6 months of purchase which is proving popular. There are 2-year and 5-year fixed options which are now available to portfolio and non-portfolio clients.
Foundation Home Loans also have some “ERC 3” products which are 5-year fixed rates that only have Early Repayment Charges for 3 years and could be an attractive option for landlords who may need to refinance before the fixed term is up. It is worth being aware of these schemes as they will not necessarily be the cheapest rate but could be a better choice in certain circumstances.
It is a current trend that 5-year fixed rates are often the preferred option in today's marketplace, accounting for over 50 per cent of new buy-to-let mortgages. However, in this period of economic uncertainty some buy-to-let investors may be interested in even longer fixed rates, especially as interest rates are still relatively low. There are a number of 7-year and 10-year fixed rate options currently available which may suit some clients.
It is apparent that lenders are starting to think outside of the box in terms of product design and looking for ways to provide financial solutions for landlords in this ever-changing marketplace and there are now options beyond the mainstream that could help them.
The government has introduced new rules in England, banning landlords and agents from charging fees to tenants associated with setting up or maintaining a tenancy and capping tenancy deposits at a maximum of five weeks’ rent.
Designed to allow tenants to see, at a glance, what a property will cost them in advertised rent, the Tenant Fees Act 2019, applies to all new or renewed tenancy agreements, student lets and licences to occupy housing in the Private Rented Sector (PRS) signed on or after 1 June 2019 – and to all applicable tenancies and licences in the PRS from 1 June 2020.
Allowable fees and charges
Put simply, the only payments that landlords or letting agents can charge to tenants in relation to new contracts are as follows:
- a refundable tenancy deposit, capped at no more than 5 weeks’ rent where the total annual rent is less than £50,000, or 6 weeks’ rent where the total annual rent is £50,000 or above
- a refundable holding deposit (to reserve the property) capped a no more than 1 week’s rent
- payments associated with early termination of the tenancy, when requested by the tenant
- payments capped at £50 (or reasonably incurred costs, if higher) for the variation, assignment or novation of a tenancy
- payments in respect of utilities, communication services, TV licence or Council Tax
- a default fee for late payment of rent and replacement of a lost key / security device giving access to the house, where required under the tenancy agreement
Any fees that aren’t on the list are prohibited and the government’s guidance makes it clear that landlords and agents can’t charge for:
- admin activities or time taken to set up a new tenancy, including reference checks or credit referencing
- providing an inventory
- checking a tenant out at the end of a tenancy
- a professional clean at the end of the tenancy (although landlords may request that a property is cleaned to a professional standard); and
- wear and tear
Prohibited payments are outlawed under the ban and landlords can’t get round the rules by asking tenants to undertake and pay for these items via a third party.
In most areas, the Trading Standards authorities will be responsible for monitoring and enforcing the rules. A breach will usually be classed as a civil offence, carrying a financial penalty of up to £5,000. If a further breach is committed within five years of a financial penalty or conviction, it will be treated as a criminal offence, subject to an unlimited fine.
Landlords will also have to refund any unlawful fees to tenants.
Savings for tenants
The government estimates that implementation of the Tenant Fees Act will save tenants across England at least £240 million a year, or up to £70 per household.
However, ARLA (The Association of Residential Letting Agents) is less sure, and questions whether landlords will be forced to increase rents to cover at least some of the costs.
What’s clear is that landlords can no longer add on fees over and above the headline rent, except for a very limited set of circumstances.
The Government’s consultation, A new deal for renting: resetting the balance of rights and responsibilities between landlords and tenants, draws to a close on 12 October 2019.
Implementation of the key proposals – removal of the Assured Shorthold Tenancy (AST) and abolition of the Section 21, no-fault eviction process – if adopted as planned, will mark a landmark moment for the PRS.
Interestingly, both measures were brought in as part of the Housing Act 1988 and both helped to encourage investment in the sector by enabling much more flexible arrangements, not only for landlords but also for tenants.
The expansion of the sector is well-charted and, with one in five people now relying on the UK’s Private Rented Sector (PRS) for a home, the Government hopes its proposals will introduce greater security for those tenants who need it, whilst maintaining flexibility for those who don’t.
If implemented, the proposals mean all new tenancies will either be an assured periodic tenancy – effectively an indeterminate tenancy - or an assured fixed term tenancy, which reverts by default to a periodic tenancy.
Tenants will be able to end a tenancy with two months’ notice.
Landlords, in contrast, will only be able to end a tenancy where they can prove they have legitimate grounds under Section 8 of the Housing Act, with a notice period of between two weeks and two months depending on what those grounds are.
Section 8 does already give a wide range of grounds, including a breach of tenancy agreement, such as rent arrears or damage.
However, it doesn’t allow for a situation where a landlord is looking to move into their own property or to sell it and the government is proposing an update to accommodate this change.
Equally critical for landlords is the process they need to follow if a tenant refuses to leave at the end of the notice period.
Today, whether using Section 21 or Section 8, landlords need to make a court application for possession if they find themselves in this situation.
However, while landlords using Section 21 can follow an accelerated possession process where appropriate - making a formal court hearing unnecessary in many cases - landlords using Section 8 don’t have this flexibility.
Few would argue the court system is sufficiently resourced to manage the increase in workload these proposals will deliver and indeed the government is exploring whether to introduce a specialist housing court.
However, given that the median time from claim to possession using the court process is currently 16 weeks and a survey of our landlords showed 85% feel this should be eight weeks or less, a solution needs to be found and found quickly.
Download NLA’s guide on how government changes to Section 21 will affect landlords
We have seen a significant rise in the number of limited company buy-to-let applications being submitted. During 2019, over 30 per cent of new mortgages each month were in the name of a Special Purpose Vehicle (SPV) or trading company.
Limited company benefits
This comes as no surprise as there are several benefits to using a corporate structure for running a buy-to-let property business. Many landlords opt to use an SPV as it can be financially advantageous and tax efficient. Since the government announced the phasing out of mortgage interest tax relief by 2020, there are now more reasons to consider the limited company route to reduce tax liabilities.
In terms of buy-to-let mortgage options, limited company products can also provide advantages to landlords as the PRA regulations relating to rent stress tests for personal applications are not applicable (a rent stress test is the calculation that lenders use to determine how much they will lend to you).
It means that the rental calculations can be more achievable for SPVs – typically at 125 per cent at 5 per cent or at the pay rate for 5-year fixed rates – which may allow applicants to borrow more through a limited company.
Wide choice of mortgages
There is growing competition among lenders for limited company buy-to-let – we currently have around 30 different lenders on our panel - which means that there are some keenly priced rates available. Historically, limited company mortgages were considerably more expensive than personal name rates, but the gap is closing with some lenders now offering the same rates for both applicant types.
Setting up an SPV is a simple, cheap process which can be completed online within 24 hours via Companies House. Most lenders will lend to newly established SPVs providing they are set up for the sole purpose of letting and managing property. For this reason, it is important that the limited company is registered with the correct SIC code – normally 68100, 68209, 68320 or 68201.
Stamp Duty costs
For existing landlords who are considering transferring their properties to an SPV it is recommended that you seek professional tax advice before proceeding. Moving properties from a personal name to a corporate entity involves a sale and purchase transaction which means that Stamp Duty Land Tax and Capital Gains Tax is payable.
Stamp Duty costs may be a deterrent to large portfolio landlords, but there are circumstances where incorporation relief may be granted by the Inland Revenue if it can be demonstrated that the portfolio is run as a business partnership – again tax advice is recommended in this scenario.
We expect the proportion of buy-to-let mortgages arranged via a limited company will continue to grow over the next 12 months as landlords realise the financial ramifications of the changes to mortgage interest tax relief once it is phased out completely in 2020.
Research shows that in 2018 over half (59%) of England’s landlords are aged 55 years or older and one third are retired. Buy-to-let lenders have started to incorporate the market’s age demographic into their lending policies by identifying the pitfalls for later life applicants and then implementing the necessary changes to remedy this.
Lenders impose a maximum number of years an applicant can have a loan for and so for older applicants the loan term may be restricted. This in turn could affect the affordability of the loans as shorter terms might equate to higher monthly payments. It is worth checking how lenders assess affordability, particularly whether state pensions are considered when calculating minimum income criteria.
Lenders are changing their criteria to make buy-to-let finance more accessible to older landlords. For example, some lenders no longer stipulate a maximum at application or completion. There are also longer-term fixed rates up to 10 years which can offer affordability relief and security of monthly payments. Variable and lifetime products may also provide a solution. Pensions including private, widow’s and war pensions are becoming more widely accepted by mortgage lenders and existing landlords may also be able to use rental income in their income credentials.
NLA Mortgages' Online Application Form for buy-to-let mortgages is designed to make your life easier by simplifying the application process and saving you time.
Contact our team to discuss any enquiries you may have on:
Monday – Friday: 9am – 5pm
Saturday and Sunday: Closed
T: 029 2069 5555