The majority of UK landlords did not set out to create significant property businesses and, even today, about half (49.7%) of buy-to-let investors own just one property. However, during the past two years, the government has forged ahead with a raft of measures designed to encourage more incorporated landlords with multiple properties to enter the buy-to-let market and provide a professional service to meet the rapidly increasing demand from the private rental sector.
One of the government’s recent policy changes has been around mortgage interest tax relief – the brainchild of former chancellor, George Osborne.
From April last year, private landlords were no longer able to deduct all of their mortgage interest payments when working out their annual profits. By 2020 the relief will be cut back to just 20%. However, those operating their property portfolios through a limited company are exempt from the changes and can continue to claim tax relief on mortgage interest – a clear nod to the government’s aim of professionalising the buy-to-let market.
This, and other tax-related developments, has forced private landlords to evaluate their position to see if they are suitable candidates for becoming incorporated. There is growing evidence to suggest that many have already made the leap - research from banking provider, Kent Reliance, reveals that more than two thirds of new buy-to-let applications are now from limited companies, as opposed to individuals and there is a growing sense that this will continue, particularly as the tax relief is gradually phased out and landlords begin to feel the impact.
However, the buy-to-let mortgage sector has been somewhat sluggish to adapt to this demand, with brokers still typically underwriting incorporated applications from limited companies as commercial loan applications as opposed to specific buy-to-let applications. This broadly means the terms of any mortgages available are far less favourable and in many cases, not available at all.
Access to affordable finance is the lifeblood of property investment and it is imperative that mortgage lenders quickly adapt – anecdotal evidence already suggests that it is causing a bottle neck on completions up and down the UK.
Though obviously important to investors, tax efficiency will always play second fiddle to critical mortgage funding and landlords will become increasingly frustrated if they miss out on key properties due to the lack of responsiveness from lenders. Ultimately, the sooner brokers and lenders adjust to this new demand, the quicker the sales wheels can start moving again.
One bright spot on the horizon for private landlords looking for funding could come in the form of open banking. Earlier this month, the UK’s biggest banks were the first to trial a programme which allows licensed competitors direct access to consumer data. Its success is largely dependent on consumer engagement in the programme and private landlords are among the groups most likely to recognise the benefits. With access to a borrower’s full financial picture in terms of mortgages, savings and any other debts, the mortgage application process could become more streamlined and see funding being agreed within a much tighter time frame.
The buy-to-let landscape is certainly changing in the UK, but with healthy yields still to be achieved and significant infrastructure projects such as Crossrail and HS2 pushing up prices in key locations, it is full of opportunities – especially for those landlords who are keeping abreast of the changes and continually evaluating the best position for their individual portfolio. We trust lenders will now step up to the plate to help landlords take full advantage of the gains on offer.
Andy Foote is a director at UK property investment and development company, SevenCapital.