The impact of tax changes, higher interest rates and potentially restrictive policies have pushed landlords to reconsider their buy-to-let (BTL) investments.
In some parts of the sector, it has been speculated that this is driving landlords out of the market, while others say they are simply becoming more strategic in their movements.
So this month, Mortgage Solutions is asking: In what ways are landlords being more savvy regarding the buy-to-let market?
Akhil Mair, managing director of Our Mortgage Broker
As the BTL market becomes increasingly challenging, landlords are adapting with more savvy strategies to ensure their investments remain profitable.
Landlords are expanding their portfolios to include diverse property types such as student accommodation, holiday lets, and houses in multiple occupation (HMOs), which often yield higher rental returns. Additionally, with the rise of remote working, areas outside major cities are becoming attractive investment opportunities. Properties in commuter belts and smaller towns offer more affordable prices and potential for capital growth, appealing to tenants seeking a better quality of life away from urban centres.
In response to tighter regulations and tax changes, some landlords are streamlining their portfolios by selling off less profitable properties. This allows them to focus their resources on higher-yield investments and reduce exposure to underperforming assets.
Auctions are becoming popular for landlords seeking to purchase properties at competitive prices. This method can often result in acquiring properties below market value, providing instant equity and potential for higher returns after refurbishment or development.
To maximise investment potential, landlords are increasingly using varied financing options. Bridging loans are popular for quickly purchasing properties that require renovation. These short-term loans provide the necessary capital to buy and refurbish properties before refinancing onto a standard BTL mortgage. Second charge loans and loans against unencumbered properties are also being used to release equity, enabling landlords to invest in additional properties or fund improvements without selling assets.
In light of the tax changes in 2017, many landlords are setting up limited company structures for their investments. This approach offers several tax benefits, including the ability to offset mortgage interest against rental income and lower corporation tax rates compared to personal income tax. Additionally, it can provide a more efficient way to manage and grow property portfolios.
By adopting these savvy strategies, landlords can benefit from higher rental yields and reduced vacancy rates.
Using auctions and varied financing options can also result in cost savings and better cash flow management.
Additionally, setting up limited company structures can lead to significant tax savings and more favourable financial planning, while selling off less profitable properties and diversifying investments help spread risk and ensure a more resilient portfolio.
These strategies reflect a proactive and informed approach by landlords, enabling them to navigate the complexities of the current market and sustain their investment returns.
Changes to taxation, legislation and increased interest rates mean that landlords are having to review whether their BTL investments are still viable income-producing and/or capital growth opportunities. Investors will have felt the effects of the changes to their tax positions in recently submitted tax returns where they have no longer been able to offset interest payments against income received.
All landlords should be encouraged to seek tax advice in light of changes that have happened. They can then be fully informed when considering future available options.
Some clients are considering selling. For example, smaller incidental landlords who find themselves pushed into the ‘60% tax trap’, i.e., those who lose their personal allowance by being pushed into higher-rate tax brackets.
Some clients will continue to navigate a more difficult BTL market looking for opportunities, solutions and choice.
Strategies include using limited company structures, which has some tax advantages, but can also help with improving borrowing capacity, as limited company stress tests can be more generous. They are also purchasing properties with higher yields and greater demand such as HMOs, or from distressed sellers.
Also, some affordability calculators that permit borrowing on one-, two-, or three-year fixed rates are proving popular. Although some of these products come with big fees, which landlords do need to weigh up, many are prepared to pay so they can have the flexibility to review again in the shorter term, rather than being stuck on five-year fixes.
Although, some actually prefer five-year fixed rates to weather the storm.
Landlords are also remortgaging onto a bridge rather than reverting to a higher standard variable rate (SVR) or longer-term fixed rates, to provide some respite until interest rates start to fall.
Some are choosing lending options based on market rent rather than rent received, which is a good option when landlords are reluctant to increase rents. Landlords don’t just increase rents to pass the expense of higher interest rates – sometimes it’s to have a chance of meeting increased rental stress calculations.
Others are going for a product transfer, which might not always be the most competitive, but can remove complications arising from stress tests or valuations on a new application.
Top slicing affordability assessments can be a helpful option for those with larger incomes, and other options include restructuring debt across portfolios, leveraging against unencumbered or lower geared properties, or conversely reducing BTL balances with savings.
Ultimately, many clients are merely planning ahead and asking about their options for remortgages that aren’t due until 2025.
Howard Reuben, principal of HD Consultants
In the main, our property investor clients have always run their rental businesses with a degree of diversification, including holiday lets and the HMO market, as well as the standard assured short-term (AST) strategy, too.
What we have increasingly come across recently, however, in light of the changing global and political issues, is the consequential impact on a transient population, and as a result the increasing demand for mortgages for properties enabling vulnerable and immigrant groups to have homes, via Serco-type contracts. These contracts also give the property investor extra peace of mind for their yields and returns via guaranteed rental income for a longer amount of time.
Of course, there is a growing demand, especially with new landlords, to set up their new property ownership structures in limited company arrangements. We always advise our clients to speak with a property- or landlord-focused accountant to check whether this is the most tax efficient way to structure their portfolio (as well as succession planning, flexibility of ownership, etc) and also to ensure that the company is set up correctly in the first place in line with what lenders want to see.
If it is set up incorrectly, this can limit the landlord on the lenders they can go to for mortgages.
Apart from that, there hasn’t been significant diversification, however I have had some landlords remortgage unencumbered properties to build their ‘war chest’ so that they can immediately provide funds to secure new purchase opportunities in Q4.
With the election ‘dust settled’, our clients are telling us that they believe rates will be lower and properties will be cheaper then. Once the cash is in the bank, their position as a buyer becomes much stronger.
Shekina is the deputy editor at Mortgage Solutions and commercial editor at Mortgage Solutions and Specialist Lending Solutions. She has nearly eight years of experience in the B2B publishing market, having previously covered the hospitality, retail, pet, accounting and jewellery sectors.
Shekina has worked for Mortgage Solutions and Specialist Lending Solutions for almost five years. Here, she covers the market’s breaking news stories, engages with professionals in the sector, and oversees any commercially agreed content in partnership with mortgage-related companies.
This includes presenting webinars and hosting roundtable discussions on developing themes in the mortgage sector.
She is an NCTJ-trained journalist and was nominated for the Headline Money Awards Mortgage Journalist of the Year in 2021.
In her spare time, Shekina likes to read, travel, listen to music and socialise with friends.
She currently reports on current events in the mortgage market and liaises with financial clients to produce sponsored content.
Follow her on Twitter at @ShekinaMS