Buy to let: Managing a changing...

How can we as an industry work together to ensure that buy-to-let lending meets the needs of evolving demographics?

With an ageing population, more rental demand but increasingly punitive rules for smaller landlords, what does that mean for the sector and how must advisers evolve?

Buy to let: Managing a changing market

2

“The fifth part of our housing plan addresses the

fact that more and more homes are being

bought as buy-to-lets or second homes.

Frankly, people buying a home to let should not

be squeezing out families who can’t afford a

home to buy.”

(George Osborne 2015 Autumn Statement)

BTL: Managing a changing market

3

The BTL Market: A Brief History

46

27

c.38 39-41

1 2 3 4 5 6 7 8 9 10

+40%

2007 2008 2009 2016201520142013201220112010

Gro

ss lend

ing (

£b

n)

+85%

+58%Completions

0.4

1.3

2.4

3.8

Source Market – BTL Market

4

MCD: New regulation for BTLs to differentiate between Consumer and Business BTLs.

PRA: Consultation looks to strengthen buy-to-let underwriting standards. This includes a recommendation of a minimum stress rate of 5.5% and a minimum level of stress testing to ensure loans remain affordable if rates rise.

Basel Committee: Consultation for the prudential regulation of banks. The consultation looks to increase the capital held against buy-to-let mortgages that have an LTV between 60-80%.

Treasury: Consultation seeking to give The Bank of England’s FPC Powers of Direction. This will enable them to set portfolio limits for lenders with regard to buy-to-let lending around LTV and ICR.

Policy Developments

REGULATION

BTL mortgage interest tax relief: landlords have the ability to deduct all finance costs from their rental income, with profits taxed at the landlord’s marginal rate. From April 2017 (phased over a four year period), tax relief for finance costs will be restricted to a basic rate tax credit

Wear and tear: Landlords of furnished properties can deduct 10% of their rental income from taxable profits to account for wear and tear regardless of actual expenditure. From April 2016, landlords will have to use the actual cost of replacing furnishings in the tax year of replacement will be allowable for deduction.

Stamp Duty: Landlords who are purchasing a property to rent pay Stamp Duty at the standard rate. From April 2016, an additional 3% Stamp Duty will be charged on property purchased to rent over and above standard rates.

TAXATION REGULATION

5

PRA: Consultation looks to

strengthen buy-to-let underwriting

standards.

Basel Committee: Consultation

looking at risk weights for BTL.

Treasury: Consultation seeking to

give The Bank of England’s FPC

Powers of Direction.

Macro prudential Regulation

Aim of macro-prudential regulation: to remove or reduce the risks that threaten the resilience of the financial system as a whole.

Lenders will need to further adjust

their risk appetite in relation to

BTLs.

Advisers will face tougher lending

policies including increased stress

rates.

Landlords will need advice further

than just the lending e.g. pensions

6

Period of change for BTL and PRS

Rental demand is expected to grow further

Likely to see rents rise

BTL still looks attractive relative to the alternatives

investments

Landlords are less confident, understandably

7

Landlords have time to adjust their portfolio

Large portfolios and one property landlords least impacted

Landlords may refrain from purchasing further properties

Lenders have already adjusted BTL risk appetite

Lenders will be required review their affordability assessment to include a minimum level of stress

testing to ensure loans remain affordable when rates rise

Period Of Change for BTL & PRS

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What are the key changes happening in the market place?

9

Young couples and families are the most frequent tenant types

Main tenant types (%)

50

49

39

34

30

21

20

20

16

12

11

7

5

Young couples

Families with children

Young singles

White collar / professional

Older singles

Blue collar / manual workers

Older couples

LHA claimants

Students

Retired

Other benefit claimants

Migrant workers

Executive / company lets

Source BDRC Continental Landlords Panel Q4 2015

10

CML data – Age of BTL Borrower

Source CML Data

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Changing face of the Private Rental Sector

Source: DCLG English Housing Survey

Trends in tenure

12

Source: DCLG English Housing Survey

Is the profile of the housing market changing?

13

54% of landlords have between 1 - 4 properties


14

The role of the broker

15

Relationships with either brokers or lenders play an important role for landlords when deciding how to arrange their BTL mortgages

50%

47%

20%

13%

12%

10%

2%

6%

2%

You’ve always applied for buy

to let loans this way

Why did you choose to arrange your most recent buy to let mortgage this way (%)

They could review all of the

products in the marketplace

It’s most cost effective to

arrange the loan this way

You have a longstanding

relationship with the

broker/intermediary

You have specific lending

criteria

I could not arrange a buy to let

loan directly

They were the only lender who

would offer you a loan

Other reason

Rather not say

Via a broker, intermediary or IFA Directly with lender

It’s most cost effective to

arrange the loan this way

You have existing Buy to Let

loans with that lender

You have your residential

mortgage with that lender

You have a personal

account with the

bank/building society

You’ve always applied for

buy to let loan this way

You have specific lending

criteria requirements

They were the only lender who

would offer you a loan

Other reason

Rather not say

44%

24%

21%

13%

9%

9%

2%

8%

4%

Brokers expertise of the marketplace is the most common reason why landlords choose to arrange a loan through them, whilst having an

existing BTL loan or personal account with a lender influences landlords to arrange directly with them.


16

As a result of the Stamp Duty levy, 43% of landlords intend to either reduce the number of properties in their portfolio, or not buy any further BTL properties

• However, there are landlords that still remain unsure

Tax advice


35%

28%

10%

5%

22%

Will not affect plans

What influence, if any, will this have on your plans

for your portfolio in the next couple of years? (%)

Will not be buying any

more property(ies)

Will reduce the number

of properties I buy

Will sell properties

Unsure at this stage

43%

NET:

Change

plans

Do you plan to apply for any new/additional

Buy-To-Let loans before the new Stamp Duty

changes come into force from April 2016? (%)

No

Unsure Yes

13%

74%

13%

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• Although down slightly (-3%) from Q3, half of landlords continue to find it difficult to keep up with changes in legislation, this is especially the case for single property landlords (58%).

The Broker’s Role?

77%

77%

50%

31%

28%

11%

11%

33%

28%

51%

My properties are my

pension

I always look for new sources

of advice specifically for

landlords

I find it difficult to keep up with all

the changes in legislation

I think of myself as a property investor rather

than a landlord

I have a clear ‘exit plan’ when it’s

time to leave the rental sector

True False


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Could lending tighten?

Will the tax changes affect growth in the BTL market?

Consideration must be given to the BTL market becoming a specialist lending market

Brokers may need to specialise in advice e.g. lending, tax, pensions

Is 3rd party relationships the way forward?

Is this an opportunity to charge a specialist advice fee?

Do lenders have a responsibility to contact customers about tax changes?

Still many unanswered questions, but change is the only constant!

Conclusions:

Buy to let: Managing a changing...

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