Commercial Watch: The long road to recovery
As the market seeks to rebound from Covid-19, now is the time to offer BTL clients solidarity and support
The buy-to-let mortgage market has been significantly affected by the lockdown measures that have been imposed due to coronavirus, with Moneyfacts recently reporting that the overall number of BTL products available had dropped markedly during the spring.
We have also seen many lenders responding to the crisis by reducing their maximum LTV, resulting in fewer product options for landlords in the 80 per cent LTV bracket and the removal of 85 per cent LTV mortgages. Landlords who have highly leveraged property portfolios may find it challenging to find a suitable remortgage solution, and those without a large deposit may be put off making new purchases.
Prior to the Covid-19 pandemic, the BTL mortgage sector saw lenders expanding their propositions, softening criteria and entering more specialist lending areas such as HMOs, limited companies and multi-unit blocks. Many of these lenders have since reversed their policies and withdrawn from the complex BTL sector, leaving established and specialist lenders to serve the market.
The BTL sector has slowed down considerably due to several factors. Firstly, the government advised people to delay house moves, which slowed the housing market and impacted on BTL purchase transactions; and secondly, lenders either suspended valuations altogether or moved to using desktop valuations and AVMs during the lockdown.
Now that lockdown measures are starting to ease in the UK, many lenders are beginning to carry out visual inspections again, which should kick-start the lending process in the BTL sector. There is also likely to be pent-up demand for finance.
With the Bank of England base rate at a historical low, landlords may have been hoping to see a reduction in the costs of finance during the coronavirus crisis – but with reduced competition in the marketplace, many lenders increased their rates during the spring. Nonetheless, as business starts to return to normal, lenders are likely to regularly review their pricing strategies according to the increasing demand and competition that emerges.
Putting aside the coronavirus story and looking at the general picture of the BTL sector, there have been other changes that have impacted how landlords view their property-investment businesses.
The various regulatory and tax changes over the past five years have resulted in some landlords struggling to make rental property a viable investment, with some opting to sell up and leave the sector. However, a recent survey by accountants Moore shows that the number of landlords with 10 or more properties in their portfolio has remained constant over the last couple of years, at around 43,000.
This indicates that professional landlords are more likely to view BTL as a long-term investment strategy, and demonstrates the underlying strength of the private rented sector in the UK.
Tax relief phase-out
The final phasing out of BTL mortgage interest tax relief came to an end in April this year, which means some landlords will now incur additional costs to their rental businesses and may be considering ways to keep profits healthy. This change to taxation has certainly generated a growing interest in the benefits of using a limited company for BTL property investments.
At TBMC, around 35 per cent of applications are now in a limited company name, and we are often asked whether clients should opt to use one. However, it is not a question that we can readily answer, as every case is different, so we always recommend that landlords seek professional tax advice if they are considering this option.
As a mortgage broker, we can help landlords assess the financial implications of incorporation by providing comparable quotes both for personal name and limited company BTL mortgages. Historically, limited company finance has been more expensive than personal name finance, but the gap is narrowing, and we have several BTL lenders on our panel who provide the same product offering for both applicant types.
It is difficult to say how long it will take for the BTL mortgage market to recover fully, but this is a good time to provide solidarity and support for BTL clients. Mortgage brokers provide a valuable service, helping landlords navigate the new lending landscape and find the best financial solutions available.
Jane Simpson, managing director at TBMC