Supporting first-time landlord clients
Despite the changes to the buy-to-let sector in recent years, there still remains a desire among many to become a landlord. Accord Buy to Let opened its lending up to first-time landlords in July and has attracted a number of borrowers entering the market.
But it’s important for would-be landlords enter the market with their eyes open. Chris Maggs, Commercial Manager at Accord Buy To Let, offers guidance to brokers who have clients looking to start out in the private rental sector.
Is buy-to-let still a worthwhile investment?
There continues to be demand for private rented accommodation as people will always need somewhere to live and not everyone can or wants to buy their own home, therefore there is still a place for landlords.
There has been a growing trend towards people living in rented accommodation. According to data from the English Housing Survey1 the private rental sector represented 20% of households in England in 2015-2016, more than double the levels seen in the 1980s and 90s.
However, the buy-to-let market has changed significantly in the last thirty years. New landlords need to see bricks and mortar as a long-term investment, rather than expecting significant yields instantaneously.
What’s a first-time landlord’s first port of call?
As a broker you can provide guidance on how much a client can borrow and offer advice on the best mortgage options for their circumstances. It may be helpful to signpost your client to a tax adviser who can navigate them through the recent changes to tax relief and how it may impact them if they are looking to achieve regular income from the let property.
The government announced that from April 2016 higher rates of stamp duty would apply to second property purchases. Buy-to-let customers looking to purchase an additional property, where they already own either a residential property or a buy-to-let property, will be liable to higher rates of stamp duty*.
What does a new landlord need to get started?
They will need to have a significant deposit to secure their first rental property. As lenders’ rental calculation requirements are getting tighter, lower loan-to-value mortgages are becoming more prevalent in the market, which is forcing landlords to find bigger deposits.
What other things will your client need to consider?
Being a landlord can be hard work. It requires ongoing financial investment, keeping a weathered eye on the market – especially as it is under constant scrutiny at present, plus maintaining relationships with tenants or letting agencies.
As well as having enough money to cover the deposit on their mortgage it’s a good idea for clients to ensure that they have a nest egg which they can use to fill any rental voids.
It may be worth flagging that it’s not all plain sailing once a tenant has moved in, their property still needs to be managed and maintained.
That’s why lenders require rent, either expected or received, to cover monthly mortgage payments often by at least a rate of 135%, if not higher. The lender will usually base this calculation on a higher interest rate than your client may actually be expected to pay to allow for increases in interest rates and to ensure a sufficient surplus of rent to cover costs of managing a buy-to-let property.
It’s impossible to be able to fully vet a tenant’s behaviour. Missed rental payments or damage to property are things a landlord needs to be prepared for. The tenant’s bond will cover a small percentage of this. You could perhaps encourage your client to draw up a thorough rental agreement so tenants are aware of any costs they could be liable for.
Previously, landlords were able to deduct mortgage interest and other finance-related costs from their rental income before calculating their tax liability. However, this is being gradually phased out between April 2017 and April 2020.
Also by April 2018 all rented property will be required to have an Energy Performance Certificate (EPC) of E or above.
The final thing to be aware of is that whilst landlords have been benefitting from record low mortgage rates, there’s an expectation that this won’t last for much longer. We have already seen a number of lenders increase the rates on their buy-to-let offerings, and a potential Bank Rate rise could prompt further rises.
Are there any ways to make things a bit easier?
Renting a property though a letting agency is often a favoured approach, especially among first time landlords. This takes the hassle out of finding and maintaining relationships with tenants. Most agencies undertake regular property checks during the course of the tenancy on your behalf.
Is there anything else I should know?
In a buoyant market landlords are able expand their portfolio by raising capital from other properties in their portfolio, which means they only ever need money for one deposit – for their first property. This method of raising capital works particularly well when property prices go up.
In the current market this is tougher to do now. New landlords need to ensure they have a sufficient deposit in the first instance, then further additional savings or the ability to raise equity from their property in order purchase further properties.
Needless to say that owning buy-to-let properties continues to be a lucrative venture for many. Earlier this year 63% of landlords surveyed by Simply Business2 said they valued the additional income their rental properties gave them.
The key thing to remember for new landlords to remember is that they need to be in it for the long haul to optimise the greatest returns.