Difficult Times Ahead for UK Landlords
When you look on the surface, the property markets numbers paint a bright, positive future for UK landlords but when you look closer things become clouded and complicated.
Over the last 6 months, 41% of landlords have reported a rise in tenant demand. This has lowered the time of average void periods and ensure stability of rental income for landlords. Over the past 12 months it’s reported that 18% of landlords have increased the size of their rental portfolio.
Better yet, the demand for rented accommodation continues to climb despite Help to Buy and higher LTV lending which enable first time buyer activity. The property price growth has lifted the first step to home ownership too high for many first time buyers and therefore, the private rented sector remains the safe zone for people who need to save or are not yet ready to commit to home ownership.
Although the majority of landlords do not intend on raising their rents in the next year, 43% polled by Move and Reeds Rains report that they will increase rent and 57% of those landlords raising rent prices report it’s to cover inflation. Paying for maintenance work is the second most significant reason.
Despite all the positive numbers Landlords do predict that rent rises will slow for the forthcoming year and will be lower than inflation, this is because The Bank of England’s 2% target for inflation may come in higher than landlords 1.8% rent increase and below the current 2.4% annual rent growth.
Buy to Let Problems Ahead
The mortgage market has been revived this year, but the most recent wave of reforms has focused on stricter lending conditions and this isn’t just creating an extra hurdle for first-time buyers, but for landlords too.
The Bank of England’s extra powers to direct lenders approach to buy to let investors will potentially need at least 40% of a deposit, according to Countrywide. This will mean that lenders will have additional stress tests of landlord applicants.
As the regulations stand currently, the borrowers ability to meet repayments is as discretion of the lender. Often the criteria is whether or not their rent will cover 125% of their interest component on their mortgage.
This rate has typically been around 5%, however some lenders already do a stress test of different interest rates up to 7%. With stress test to see if the buyer could cope with a interest rate of 7%, a third of new landlords will need to pay an additional £40,000 equity on average.
Landlords and Countrywide fear that the if the new Bank of England powers are granted, the potential rise in interest rates and the stress test would cause serious complications for landlords.
Stress testing on new loans for landlords has the potential to increase entry barriers and hurdles for established landlords. The government and Bank of England need to ensure that further regulation changes do not put lending out of reach for satisfactory applicants.