What you need to know about complex buy-to-let

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Enterprise Finance
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Supported by
Enterprise Finance
What you need to know about complex buy-to-let

There are clients who have a specific investment goal in mind, with particular income objectives or need for flexibility, which can only be met by a specific type of property investment.

Not all investors want to rent out a 'vanilla', single-resident house or flat; they require diversification above and beyond the traditional property type.

In a nutshell, Harry Landy, managing director of Enterprise Finance, explains complex buy-to-let as: "A case where the high street lenders are less likely to lend."

According to Jeremy Duncombe, director of the Legal & General Mortgage Club: “Some investors find it difficult to find a ready-made buy-to-let mortgage that fits their particular circumstances, which means they need additional help finding a product that is suitable for their financial situation and needs. 

“These more customised mortgages are often referred to as complex buy-to-let.”

The truth is, most buy-to-let cases tend to have some level of complexity to them. Jeremy Duncombe

These complex buy-to-let property purchases tend not to fit into the traditional single-occupier house or flat category, which tends to be categorised as a three-bed house or flat, with one residential tenant.

As David Hollingworth, associate director of communications for London and Country, comments: “In many cases, complex buy-to-let cases have elements that might not quite fit with a ‘vanilla’ lender or product.

“What makes a case more complex could be to a variety of different elements, ranging from the type of property to the method of ownership, such as a limited property buy-to-let.”

Houses in multiple occupation

For example, a house in multiple occupation (HMO), where the original structure has been remodelled to create multiple dwellings, would be considered ‘complex’.

The Housing Act 2004 introduced a new definition of an HMO from 6th April 2006 in England and 30th June 2006 in Wales.

If an HMO has multiple units, occupied by at least three unrelated tenants, the landlord could benefit from four times the rental income, compared with a single tenancy buy-to-let property, which is why it can be an attractive buy-to-let prospect. 

Examples of HMOs, according to the Residential Landlords Association, include: 

  • Bedsits.
  • Shared houses.
  • Lodgings.
  • Hostels.
  • Individual shared self-contained flats/cluster flats.
  • Blocks of converted flats.
  • Halls of residence (privately operated).
  • Asylum seeker/migrant accommodation.
  • Accommodation for workers/employees.
  • Refuges.

Although the range of potential properties is wide, and the revenue stream attractive, there is a greater deal of complexity.

For example, the landlord will face additional bureaucracy, such as informing HM Revenue & Customs and, if it is a large HMO (with more than five occupants), the landlord must seek a licence, which has to be renewed every five years. On top of this, they will have to pay a council fee.

Multi-unit freehold blocks

Another complex buy-to-let property is a multi-unit freehold block (MUFB). According to Mortgages for Business definitions, a MUFB is classified as a property with more than one independent residential unit owned under a single freehold title. This would include a purpose-built block of flats or a single house converted into discrete flats.

Generally, each MUFB has the following characteristics:

  • Each unit is let on its own AST agreement.
  • Private areas that are the personal space of each unit to which no one else has access.
  • Separate entrances for each unit.
  • Some have common areas such as hallways and gardens.

Semi-commercial properties

A semi-commercial property (SCP) is more commonly known in the industry as “mixed use” property. Examples of an SCP include a property such as a shop on a high street which has a flat or flats above it, or a residential element to a commercial property, such as a groundskeeper's lodge, or a bed and breakfast where the owners live in the building.

SCPs are exempt from stamp duty surcharges, because the entire property is not classed as residential, even though it has both a residential and commercial element.

These and other complex buy-to-let products, as with the HMO, can be subject to additional bureaucracy, are not as simple to underwrite, survey and lend upon as a single-owner, standard flat or house.

For example, these complex buy-to-lets often come with much higher maintenance and mortgage costs, which could add to lenders' concerns about whether prospective landlords can afford to take out the mortgage on the property.

On top of these are other concerns, as Mr Landy outlines. There could be a complication with the borrower themselves. "For example, they are a limited company, or an expat or foreign national.

"They could have more than four properties and be considered ‘professional landlords’ with additional PRA checks needed, or be falling foul of higher rental coverage ratios that the High Street have been implementing."

Then there could be concentration limits. Mr Landy explains: "This means the maximum number of properties in a single block, or the maximum number of properties on one street, that a lender will lend on."

According to Charlotte Nelson, finance expert at Moneyfacts: “The tougher affordability rules which have reduced the amount landlords can potentially borrow are being felt in the market. 

“This extra regulation means borrowers will face added checks and questions about their finances.” 

Add to this tighter lending criteria since the 2008 financial crisis, the 2014 Mortgage Market Review and the 2016 Mortgage Credit Directive, some respondents to this guide have commented that the government itself is creating an “increasingly restrictive environment for landlords”, as John Goodall, chief executive and founder of Landbay has expressed it.

Multiple properties

But even for investors with multiple 'vanilla' properties, buy-to-let has become more difficult. Mr Smith-Thompson explains: “If a client has multiple buy-to-let properties, then things will naturally get more complicated.

“The adviser or master broker will need to guide the client on the wider tax implications of taking this investment route.

“This can, in turn, lead to introducing the concept of a limited company structure, adding an extra layer of administration processes and systems to the case.”

And with a raft of changes in tax and legislation, Jamie Smith-Thompson, managing director of advisory firm Portafina, believes it is difficult to differentiate so clearly between ‘simple’ and ‘complex’ buy-to-let.

He comments: “As a way of providing a side income or an investment, buy-to-let is not as simple as it used to be, due to changes in legislation which have made processes and systems far more complicated for the landlord to navigate."

Louisa Sedgwick, director of sales, mortgages, for Vida Homeloans, agrees, stating she believes all buy-to-let is now no longer ‘mainstream’. 

“Since the changes in regulation and the government initiatives in relation to taxation and stamp duty land tax, buy-to-let is no longer a mainstream proposition and should be treated as complex”, she says.

“With further changes coming to the way buy-to-let portfolio cases will be underwritten by lenders from 1 October this year, intermediaries will be responsible for underwriting their landlord clients' circumstances in far more detail than previously, making buy-to-let applications potentially more complex."

Since the changes in regulation and the government initiatives in relation to taxation and stamp duty land tax, buy-to-let is no longer a mainstream proposition and should be treated as complex. Louisa Sedgwick

Mr Duncombe agrees: “The truth is, most buy-to-let cases tend to have some level of complexity to them.

“As announced in last year’s Summer Budget, mortgage interest tax relief will gradually be cut back to 20 per cent between 2017 and 2021. 

“This reduction in tax relief will prove to be quite costly for some landlords. These updates to tax legislation mean customers will now need to decide whether they should buy their property or remortgage in their own name of through a limited company.”

This has made it more complicated for the adviser and even the lender, as Chris Ioannou, senior IFA for Prestige IFA, explains.

He comments: “A higher rate taxpayer, or someone now moving into the higher rate band as a result of the tax changes being introduced certainly does present both the applicant and the adviser with a far lot more to consider and to work through.”

For Martin Reynolds, chief executive of SimplyBiz Mortgages, there is “no solid definition of what ‘complex’ means. He says: “The complexity of a particular customer scenario may relate to the property or properties, the structure of the loan or the customer themselves.

“Complexity is in the eye of the beholder.”

simoney.kyriakou@ft.com