For those in the property and finance industries, it will not come as a surprise when I say that the Buy to Let (BTL) market has had its ups and downs over the last few years.
As one example, the Bank of England Base Rate and, consequently, the cost of borrowing have been on an upward trajectory over the last year, which has put pressure on this sector of the market. Although there have been, and still are, some real advantages to having a BTL property, there may be hurdles coming up in the near future to face, but there may also be some real wins for tenants at the outcome.
Past
Back in the early 2000’s, for some it was approximately 25-40% cheaper to rent a home rather than buy one, many were priced out of the market due to low wage growth and there were property supply issues. This created a demand for rental properties to come to the market. Further opportunities to acquire BTL properties came following the 2008 credit crunch after house prices had fallen, and subsequently the BTL market grew strongly from 2010 onwards.
In more recent times, there have been changes to tax law which have mainly had an adverse effect on the financial benefits of owning a BTL (other than the stamp duty holiday of 2020-21). In 2016, a 3% stamp duty surcharge was introduced for properties in addition to the main residence being acquired, which made it harder for some to enter the market. Then in 2017, changes to the Mortgage Interest Tax Relief rules meant that private landlords had a reduced amount of profit reaching their pockets. It is from this that we have seen the rise in the “Limited Company BTL”, where the mortgage payments are seen as a business expense and can have the potential to be more tax efficient. The number of landlords opting for this route continued to grow.
Present
Following the “fiscal event” of September 2022 and the market turbulence that followed, mortgage rates across the board increased, and for BTL products this meant that the interest coverage ratio (ICR) calculations also increased. Although these calculations have been on a rollercoaster for some lenders, the size of the loans achievable are lower than they have been previously, both on purchases and for the large number of remortgages due this year.
The obvious solution here would be to increase rents, but even with doing this, profit margins are shrinking. This also creates the potential issue of tenants not being able to afford the rent, and if tenants cannot afford the rent, then the landlord has empty properties on their books, creating an increase in landlords selling. Hamptons estate agents, part of the Skipton Group, have said that there were 35,000 more BTL properties sold than bought in 2022, although this is a trend that has been seen since 2015. But what an opportunity this might create for first time buyers if it were to continue!
Future
Approximately 20% of the carbon output of the UK comes from its housing stock, so it is not a surprise that it is high on the Government agenda in its efforts towards hitting Net Zero. The next stage of this for the BTL sector is with the planned changes to the Energy Performance Certificate (EPC) regulations. At present it is planned for an EPC rating of C to be needed for all new tenancies from 2025, and for all existing tenancies from 2028. This is up from the current minimum of E.
Benefits of higher EPC ratings
Although there will be a cost to the landlord to make these changes, there are some real benefits to their tenants once completed. It is expected that energy bills for tenants could drop on average by £570pa, according to the think tank E3G, which is a great result when over a quarter of those renting live in fuel poverty. It may also lead to improved health and quality of life. Warmer homes reduce the risk of damp and mould, and therefore reducing the impact on the conditions they can contribute to - asthma and arthritis, as two examples. The savings made on energy bills should also hopefully lead to an increased disposable income, having a positive impact on living standards.
Members of Skipton Building Society
Some landlords may be unaware of what options they have with their properties to improve their EPC ratings. For members of Skipton Building Society, we are offering free of charge EPC Plus surveys for up to 10 properties that they own, so that they can both understand their current rating and also identify what improvements can be made. Already, there are products out in the market that offer discounts for properties with better EPC ratings.
Final thoughts
Considering the combination of changes that have already occurred in this sector and those that are still to come, we may see a further increase in landlords cashing in on their investment and selling. They may do this as they cannot draw the funds from the property to do the EPC-improving works due to the higher Interest Coverage Ratio (ICR) calculations, or it could be down to the returns not being as great as a result of increased mortgage payments. Although, a recent survey from Landbay found that over 40% of landlords are considering expanding their portfolios in the next 12 months.
The sale of BTL properties has the potential to create a big opportunity for first time buyers to get on the ladder, and also for those to get back on the ladder after some time renting. There may even be the opportunity to buy their rental property at a discount. We will have to wait and see!