The shifting rules of buy to let

We are pleased to see such strong growth in the UK buy-to-let market in recent years, which is great news for landlords.

Many small landlords have seen strong rental income with fewer so-called void months – when the house lays empty without a tenant.

We have also watched as buy-to-let mortgage lending has grown substantially with more lenders, more competition and more landlord demand.

Lenders are fighting with each other to get business as new entrants have rushed into the sector and the tenure begins to grow.

The long-term trends are also positive with private housing overtaking social housing as a more popular for the first time in the last year, according to Government data.

As British hosing becomes more expensive, more young people are renting for longer as they save for purchases.

In addition there are a flood of long-term economic and demographic trends towards renting such as high immigration, more students and a greater desire for flexibility among people in their 20s.

They are happier to rent and keep the flexibility than buy and be saddled with hundreds of thousands of pounds worth of debt. This is even more true in London and the south east where house prices are much higher and renting much more popular.

All this spells good news for landlords but it has also sparked the interest of meddling politicians looking to regulate and tax the sector.

The last Budget saw tax relief for landlords cut back to a maximum of 20%. Capital gains tax was also increased from 18% to 28% in 2010.

We were also concerned to see Labour plans for higher property taxes and landlord registration by local authorities rolled out across the country.

Some councils, such as Newham, already demand all landlords be regulated and registered but there is some momentum to roll it out further.

However, we are most concerned with plans to regulate buy-to-let mortgages being mooted by policymakers and politicians.

Chancellor George Osborne said the Bank of England will be given new powers to direct mortgage lenders offering buy-to-let.

This follows Bank moves to cap loan to income rates of residential mortgages at 4.5 times income. This means loans cannot be dished out at more than 4.5 times a borrowers’ income and can be restrictive for many buyers.

A similar situation could arise on buy-to-let mortgage as the Bank expresses alarm about recent growth and the problems associated with a bubble.

It has also raised concerns that some lenders are slipping standards and allowing borrowers to become take out mortgages when they may not be able to pay them back. Similar concerns in the mainstream market led to the biggest upheaval in British mortgage regulation last April with far more prescriptive rules on affordability assessments and income verification.

Buy-to-let loans rely on rental income not incomes although some lenders have started to buck that trend with an innovative new blended products.

Barclays is now allowing landlords to fill gaps in rental income with personal income so they can get a landlord mortgage.

This month is has introduced affordability assessments on all buy-to-let applications. It is sign of shifting times in the sector.

The rules of buy-to-let are shifting as the country goes through major housing changes with lenders and regulators trying to keep up.

For borrowers we would recommend seeking advice to see how the shifting sands of buy-to-let could help of hinder your own desire to jump on the landlord market.