Buy to Let: Helping landlords
Buy to Let: Helping landlords get the best out of their investments
July 2024
There’s no denying it’s been a bumpy ride for landlords in recent years thanks to rising interest rates, the various tax and regulation changes and the cost of living crisis all squeezing profit margins.
Brokers might have experienced clients selling up, or looking at other ways they can protect their investments while keeping returns as high as possible.
Landlords who’ve decided they don’t want to sell, or perhaps are not in a position to, might be considering options such as forming a limited company, transferring property to a partner or switching to the holiday let sector.
Or they could just be seeking advice on what mortgage deals are available to them ahead of existing terms coming to an end.
While a record number of Buy to Let limited companies were formed in 2023 (50,000 according to Hamptons), it isn’t the right option for everyone, particularly those with only one to three properties, as incorporation has its own implications around stamp duty, capital gains tax and the level of mortgage rates and fees.
That’s why it’s important that brokers are able to advise their clients about all the options on the table.
A common challenge facing landlords in this higher interest rate environment is the rent received is no longer enough to meet the affordability criteria on a new Buy to Let mortgage or remortgage.
This is where Top Slicing could help. When rental income isn’t enough to borrow the amount needed, at Bank of Ireland for Intermediaries, we can also use personal income to help achieve the 145% of the monthly interest due (inclusive of any product fees added).
The rental income needs to cover at least 100% of the stressed mortgage payment and personal income can be taken into consideration for the remaining 45%. We’ll look at a landlord’s overall affordability including credit commitments, residential mortgage and existing Buy to Let properties.
It could be that a more flexible solution is needed altogether; one that takes a common sense approach to complex financial situations, which is why we’ve designed our Bespoke proposition. As long as clients meet our five golden rules, a Bespoke underwriter will individually assess each case, to support Top Slicing clients who have good affordability but don’t necessarily fit straightforward lending criteria.
This approach is making a real difference in lending decisions. For example, we were able to help a client looking to borrow £850,000 on a joint Buy to Let remortgage over a 20 year term.
The estimated rental income was £5,200 per month on a five year term fixed at 5.04%. They had an existing residential mortgage of £1.2m, paying £7,000 per month. On paper, affordability was squeezed by a monthly outgoing of £5,500 in private school fees. Thanks to our Bespoke solution, we were able to take into account that the school fees were being paid by grandparents, therefore we were happy to exclude this fee as part of our assessment.
We’ve moved into a different phase of the housing market – an environment in which buying a low return rental property with the aim of selling in five to 10 years for a large cash return is less likely than it once was.
Notwithstanding the cost implications of higher interest rates, the requirement to pay income tax on all property earnings (new Section 24 legislation) and the reduced rate of tax relief, landlords are also having to navigate stricter fire, gas and electrical safety measures, greater energy efficiency pressures and the yet to be confirmed implications of the Renters Reform Bill.
However, opportunities remain. A stifled housing market and a reduction in the number of rental properties available have resulted in a growing demand in the private rental sector.
Rents have risen in an attempt to mitigate the higher interest rates with the average gross rental return at the start of the year being around 5.5% according to Zoopla, rising to 7.3% in some areas, with the highest returns all to be gained in the north. Figures also suggest we could be over the peak in terms of landlord sales. Hamptons data suggests the peak was in 2021, with sales declining since then. Private landlords accounted for 14% of sellers in Great Britain last year, compared to 15.7% the year before. Last year, landlords made up 11.2% of buyers, resulting in a gap overall – serving to further increase the rental demand.
The National Residential Landlords Association (NRLA) Landlord Confidence Index has also moved to a trend of optimism, with a rise in confidence, a rise in numbers intending to buy over the next year and a fall in those intending to sell.
Perhaps we’re left with landlords who are in it for the longer term, focusing on small monthly returns rather than short to medium term capital gains.
Our goal is to be as flexible as we can in our approach so that landlords can continue to make their investments work. We’ve also made it even easier for intermediaries to find out how we can help their clients through our ‘Working With Us’ hub and Live Chat.