New regulations, tax changes and tighter lending rules are changing the buy-to-let market. In these uncertain times, it’s more important than ever that landlords are clued up on their obligations and seriously savvy about minimising overheads.
Portico have revealed 5 things that landlords or potential investors need to know as we head into 2018 – from house price and rental yield statistics, and new PRA and MEES rules, to how to maximise profit and minimise voids.
1. Mortgage Interest Tax Relief Changes
Before April this year, landlords could deduct their full mortgage interest costs from their income when calculating their tax bill. Now, landlords are only able to offset 75% of their mortgage interest.
In the 2018 to 2019 tax year, this figure will drop to 50% and in 2019 to 2020 the figure drops again to 25%, until in 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction.
What should landlords do? While the changes are inevitable, landlords can mitigate the hit by cutting their interest costs by re-mortgaging. Buy-to-let mortgage interest rates have fallen significantly in recent years, so deals currently on the market may well be substantially better than on products arranged a few years ago. That being said, if you’re a portfolio landlord, you will have to consider the new PRA rules which we’ve explained below.
With large increases in property prices in London over the last few years, another good idea is to get your rental property re-valued. This will make your lender recalculate your loan-to-value (LTV), and a lower LTV means a better interest rate and a larger choice of lenders.
Whatever you decide to do to reduce your tax bill, it’s imperative you stay on top of your finances.
2. Utilising Airbnb To Avoid Void Periods
Cuts to mortgage interest tax relief are certainly going to cut into landlords’ profits – but add long void periods into the mix and landlords could wipe out returns altogether.
Thankfully there are smart ways to avoid voids and actually increase profits – and seasoned landlords are beginning to cotton on.
Currently there are 62,141 active rentals on Airbnb and a staggering 64% of those are owned by multi-listing Hosts, or landlords.
Airbnb is an increasing popular short-term solution for landlords (there’s an annual limit of 90 days for London Hosts), who are utilising the site to a) synchronise their tenancy to begin in a busy season where they can command a higher rent and b) avoid void periods by putting their property on Airbnb until they find a long-term tenant.
Portico offer a cost-effective Airbnb management service, Portico Host, to give landlords the flexibility of short-term letting without the hassle. A month or so before your tenancy is coming to an end, let us know and we can plan to get your property ready to go live on Airbnb. Our team can time it so that by the time you’ve utilised your 90 days on Airbnb – and earnt, on average, £11,520* – we will have a tenant ready and waiting to move in.
3. New PRA Rules For Portfolio Landlords
New buy-to-let mortgage rules are hitting portfolio landlords from the end of September 2017. A ‘portfolio landlord’ is defined as a borrower who owns four or more distinctly buy-to-let mortgaged properties.
What are the new rules? Under the new rules, if you want to make an application for a buy-to-let-mortgage on a new rental property, the lender will have to look at your entire property portfolio before deciding what mortgage deal they can offer. For example, if you have four properties generating enough rent to cover mortgage payments, but one property that isn’t, your new mortgage application may not be approved by some lenders.
What should landlords do? If you’re planning on investing in a buy-to-let property, it would be sensible to try and get a mortgage agreed before October. If that’s not possible, make sure you get your paperwork in order and keep your property portfolio spreadsheet up-to-date. If you are considering investing further but one of your current rental properties is underperforming, you may want to consider selling up.
4. New Minimum Energy Efficiency Standards (MEES)
Landlords have just over six months to ensure their rental properties meet the new Minimum Energy Efficiency Standards.
What are the new rules? As of April 2018, all buildings within the scope of MEES must have a minimum Energy Performance Certificate rating of E, or they will be illegal to rent out. A civil penalty of up to £4,000 will be imposed for breaches, so it’s imperative you make sure your rental property meets energy efficiency standards.
What should landlords do? Get an up-to-date EPC assessment on your rental property! If your EPC Rating is below E, our Property Management team can make a plan to improve the energy efficiency of the property, with help from our Portico Handyman team.
5. London House Prices & Rental Yields
According to the latest House Price Index from Rightmove, the capital saw a 3.2% annual price drop, taking asking prices to an average of £611,000.
Though this may be disheartening to investors, the price drop was primarily driven by the softening market in London’s most expensive, central boroughs, while property prices in the city’s most ‘affordable’ boroughs continued to rise.
Hackney and Southwark, two of the ‘cheapest’ boroughs in central London, both experienced a high annual price growth of 9.5% to £660,000 and 7.2% to and £630,000 respectively — the highest in the capital. Similarly, Barking and Dagenham, London’s most affordable borough, saw the average asking price rise by 5.2%, taking the average property price to £312,443.
It’s in these ‘affordable’ boroughs where rental yields are highest too; landlords can find a high 6% yield in Barking, and a 6.1% yield in Ilford and a 6.2% yield in Chadwell Health, (both in the Redbridge borough, where property prices grew 4.7% annually).
As our Regional Director, Mark Lawrinson, says, “If you want to invest successfully in London property, you need to think about both rental yield and capital appreciation. Location is the most important factor to consider; buy in areas that are experiencing infrastructure investment or regeneration, that offer healthy yields so mortgage repayments aren’t a problem. As London has proven in the past when it bounced back from the recession, it’s an extremely resilient city, so if you are buying with a medium to long-term view then your investment as a business or home is safe.”
Here’s where to buy in Zones 3 and 4 as suggested by property expert Mark Lawrinson.
Has Your Home Or Rental Property Changed In Value?
Find out if your house or rental property has gone up in value in 60 seconds with Portico’s instant valuation tool.