At Mortgage Advance, we wanted to touch and reflect on a few topics that interested us from the buy-to-let mortgage market and for landlords over the past three months.
This article is separated into 4 different sections, each discussing a different category comprising of the following:
1. Mortgages for landlords: Future borrowing and changes we have seen in buy-to-let applications
2. New Capital Gains Tax rules implemented by HRMC this year
3. Rising rents and how this looks across the country
4. Green Homes Grants that landlords can qualify for
Future borrowing and applications
As we are now in the month of August, many of those who took up mortgage payment holidays of up to three months from April or May would have finished their 3 month period by now, if they had decided to use the full 3 months.
One of the big questions a few months ago amongst most brokers and borrowers was how this was going to affect mortgage applications and future borrowing. There was a widespread belief from the beginning that taking up mortgage payment holidays including for buy-to-let properties would have no impact on borrowers credit scores and future borrowing and mortgage applications. When the government first announced the measure of a 3 month holiday, it was widely welcomed due to the financial difficulties millions were facing as a result of the effects of Covid-19.
We published an article on 3rd June that focused solely on Mortgage Payment Holidays’ and there we described what they were, how they worked and the deception of how they weren’t truly “holidays” but rather, deferrals. At that time, mortgage lenders weren’t able to give an accurate answer on how it would affect submitting applications to them and how they saw it. Now that a few months have gone by, we can more accurately analyse the real impact of mortgage payment holidays and the actual changes we have seen and how lenders have reacted.
One of the most obvious changes we have noted from many buy-to-let lenders (from high street banks such as Barclays to more specialist lenders such as Precise and Paragon) was the request of additional information after submitting applications that relate to Covid-19 specifically. The information tend to be questions requesting for confirmation from the borrower if they had suffered from any financial difficulties during Covid-19. The questions also included whether they had taken up any mortgage payment holidays (whether on residential or buy-to-let) and whether they had experienced any rental voids. Some lenders go further to ask for what the tenant profile is of their buy-to-let properties, how they plan to prepare for any unexpected rental voids and what their future business/portfolio plans are as landlords.
Those landlords with tenants as students are seen as borrowers of a higher risk type from certain lenders such as Paragon who used to accept students as tenants prior to Covid-19. This is largely due to a lot of uncertainty about universities re-opening and the safety of students coming back. Research by Mortgages for Business has suggested that “Landlords managing student housing and houses in multiple occupation (HMOs) have been hit hardest by the property market lockdown.” Since the uplift of restrictions, there has been very little movement and changes to that.
Most buy-to-let lenders are also only keen to resume lending on applications where landlords who had taken up mortgage payment holidays on their buy-to-let properties are now back to normal with paying the mortgages. Foundation Home Loans mainly require that as long as they can see one month mortgage payments minimum since the holiday ended then they can consider the application. Precise Mortgages require the same. It has become common practice that evidence will be required by either a posted confirmation letter from the lender that payments have ceased or that applicants provide bank statements.
A few lenders such as Landbay, Aldermore and Paragon will assess applicants who had taken up mortgage payment holidays on a case by case basis, based on the borrowers overall own merits. We have noticed that some landlords had taken up mortgage payment holidays for the full 3 months without experiencing a drop in rent from their tenants, and whilst mortgage payments have resumed, it is these kinds of cases which are less likely to be accepted by those lenders.
Some landlords have said that they took up Mortgage Payment holidays to pre-empt the possibility of future rental voids from their tenants, or for a greater ease in cashflow despite not experiencing any rental voids. Although these reasons may make sense from a landlord’s perspective, they were not the sole purpose of mortgage payment holidays, and some lenders like Landbay are less forgiving with these views, by seeing it as taking advantage of the scheme when it was unnecessary. This is something to be wary about for landlords who had taken up mortgage payment holidays, particularly if they are looking to do more purchases to expand their portfolio or raise capital on an existing buy-to-let property.
Capital Gains Tax
One of the biggest costs that landlords (particularly long-time landlords) can face, is the Capital Gains Tax (CGT) that is payable if they wanted to sell one of their buy-to-let properties.
From 6th April 2020, HM Revenue & Customs have confirmed property owners selling property that is not their home (this includes buy-to-let properties and inherited property), will now have to report and pay CGT within 30 days of selling UK property. This is a huge difference from the nearly 2 year deadline prior to these changes.
HMRC have published a document that includes an FAQ about these new rules which you can view here. They also answer the question regarding what happens if you don’t report the sale and pay the CGT liability. Transactions completed from 1 July 2020 onwards will receive a late filing penalty if they are not reported within 30 calendar days. Interest will accrue if the tax remains unpaid after 30 days.
It is arguable that given the current circumstances with the effects of Covid-19, stipulating these stricter time limits and imposing these penalties are not very fair when many people’s livelihoods are still struggling in the current climate. Robert Pollen, partner at Blick Rothenberg suggest “It would have been fairer to provide a further extension to the deadline, until later this year, when hopefully more offices are open, and people begin to get back to something closer to normal.”
In Arla’s June 2020 Private Rented Sector Report, they have found that despite everything going on with Covid-19, the average letting agency branch registered 79 new tenants per brand compared to 70 in May. This represents a rise in demand of new tenants. Interestingly enough, this was a higher figure compared to June last year where there was a record of 71 new tenants per branch.
Phil Keddie, Arla Propertymark President finds this encouraging because the figures show that “the rental market is continuing to pick up following the Covid-19 lockdown.” Usually the summer months tend to dip for landlords, however this year the rise in demand looks to be more optimistic. The month of June also reached an all time high with the number of properties managed per branch at an average of 200. Although this is slightly down from 208 from May, it topped last year’s June record of 199.
The numbers were highest regionally up north of England. Yorkshire and Humberside saw the highest number of properties managed this month of 264 per branch. Consistently, the regions in the North East, North West, Yorkshire and East Midlands were all individually higher than properties under management in London, South East and the South West.
London is seen as the city hit the hardest as result of the coronavirus. BVA BDRC research company has found that London currently has the lowest national yield at 5 percent in rental income. The average achieved rental yield yield across the UK is 5.8% in the second quarter of 2020. North East saw the highest rise in rental yields at 6.2%, rising by a full percentage point into the second quarter form the first.
The research company also stated that Central and outer London were the only places where there was a drop in tenant demand from the first quarter of 2020, in the meantime the South East and North East regions remained to grow strongly. Three quarters of Central London landlords reported a growing decline in demand in the second quarter of 2020, with 85% of landlords also expecting to be negatively impacted by Covid-19. This is the highest percentage in the country.
Only 60% of landlords in Yorkshire and Humberside felt they’d be negatively impacted.
Green Homes Grants
Chancellor Rishi Sunak announced in his summer statement on 8th July 2020 his new scheme, the Green Homes Grant which will also be available for landlords. It is a £2 billion scheme that is included as part of the government’s plan to revive the economy as a result of the coronavirus. It is claimed to support 100,000 jobs in the green construction industry.
The plan adopts some of the measures proposed by the National Residential Landlords Association (NRLA) who recommended that the scheme should be comprehensive.
The Government would provide at least 2/3 of the cost of home improvements for home owner and landlords to make their properties more energy efficient. The cost covers the hiring of qualified tradespeople to improve the energy performance in homes. It has been noted that tradespeople must register for TrustMark or Microgeneration Certification Scheme accreditation. Only these people can carry out the improvement works to the property.
There will be a maximum of £5000 per household, but up to £10,000 for low-income households for residential property owners.
To qualify, households must use the grant for at least one of the “primary” improvements:
· Insulation, including solid wall, cavity wall, under-floor, loft, or roof insulation.
· Low carbon heating, such as air source or ground source heat pumps, or solar thermal systems.
Only if you install one of the above can you also get help to install one of the further following labelled as “secondary” improvements:
· Double or triple glazing/secondary glazing, when replacing single glazing
· Upgrading to energy efficient doors (for doors installed before 2002)
· Hot water tank/appliance tank thermostats/heating controls
Ben Beadle, Chief Executive for the NRLA said: “Today's announcement is good news for landlords and tenants, and demonstrates what can be achieved when the Government works constructively with landlords.”
It’s one of the very few grants announced by the government that landlords can benefit from which is good news given that Landlords cannot let properties with an energy performance rating of F or G (unless they have an exemption.) Tenants can also benefit given it would mean a reduction in their utility bills too. The Green Homes Grant is set to start from the end of September; a date has not yet been confirmed. Although the full details have not yet been published, they are expected to follow in the near future.