What lies in store for complex buy-to-let?

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Enterprise Finance
What lies in store for complex buy-to-let?

Lenders, intermediaries and landlords alike hope there will be no further significant tax changes affecting the buy-to-let market.

However, with the scope of Brexit’s effect on the UK economy still unknown, and considerations that UK politics and regulation may reshape housing policy, there may be other headwinds that could create make all buy-to-let just that little more complex.

Politics

Brexit is the biggest issue on the agenda, with the full detail on the final negotiations still to be unveiled. The most immediate effect of any Brexit talk has so far been seen in the value of sterling, which plummeted to a 128-year low last year after the vote to leave the European Union. 

According to some economists, a fall in sterling will cause consumer price inflation, although current projections from the Bank of England do not see the rate exceeding 3 per cent. 

Although wage growth is below inflation estimates for the end of 2017 – current estimates put the average UK wage rise at approximately 2 per cent to 3 per cent. Moreover, interest rates are still low, thanks to the 0.25 per cent bank base rate. Commentators do not expect interest rates to rise significantly over the next 18 months.

As a result, it is unlikely there will be a significant strain on mortgage borrowers trying to balance repayments with rising household bills, despite any short-term stockmarket shock or further downward momentum in the sterling exchange rate.

Given the changes to criteria, tax and the new approach to portfolios, brokers will need to keep on top of what different lenders are offering and which areas represent a strength for more specialist lenders. Louise Sedgwick

Because of these factors, the Association of Mortgage Intermediaries (Ami) believes any Brexit-related uncertainty is unlikely to affect the mortgage market until 2018 at the earliest, and is more likely to show real impact the year after that.

Its latest economic outlook states: “Post-Brexit panic is a false dawn: realistically and practically speaking, the effects of the split between the UK and the EU will not begin to show for a minimum of 12 months after Article 50 is triggered

“In all likelihood, it will take a further 12 months before we really begin to feel any tangible impact either economically or fiscally."

While the UK braces itself for another general election on 8 June this year, some commentators believe there may be some respite for the mortgage market over coming months as the new government will focus on Brexit, rather than battering buy-to-let.

Pensions

Despite the tax takes on buy-to-let, subsequent raids on pension allowances – such as the reduction of the lifetime allowance from £1.25m to £1m – has made property more attractive as a long-term investment which promises some form of income in retirement.

In Retirement Advantage’s Home Truths report, 63 per cent of people surveyed recognised their pension was worth less than their property.

Alice Watson, head of marketing at Retirement Advantage equity release, has urged advisers to have more objective conversations about retirement income and the role property can play.

If one’s own home can help provide an income in retirement, renting out a second home or having a diversified portfolio of complex buy-to-let and vanilla properties could also be considered. 

Different perspective

For Louisa Sedgwick, director of sales for Vida Homeloans, there has been a mind-shift in the way buy-to-let is considered.

She comments: “The mass of changes over the past 12 or so months have affected landlords. 

“Since the wider development of the buy-to-let proposition, moving it away from a commercial transaction towards the residential model, buy-to-let transactions have increasingly been seen as ‘mainstream’. 

“This is simply no longer the case”.

Ms Sedgwick explains although complex residential buy-to-lets cannot be deemed as a “commercial” transaction, given the fact property is residential in use, the “overriding proposition needs to be recognised as a commercial one, whether that is to gain a regular rental income or for capital growth.”

She says this is likely to require a completely “different mindset” from the intermediary alike, “bringing about the demise of the dabbler or dinner party landlord”.

Importance of relationships

“Given the changes to criteria, tax and the new approach to portfolios, brokers will need to keep on top of what different lenders are offering and which areas represent a strength for more specialist lenders”, says David Hollingworth, associate director of communications for London & Country Mortgages.

Jeremy Duncombe also advocates forging good relationships with lenders and other professionals to overcome any potential challenges.

He comments: “By building relationships with tax advisers, brokers can deliver what their clients are looking to achieve more effectively.”

simoney.kyriakou@ft.com