Generation Rent: Liverpool’s changing buy-to-let landscape
Liverpool’s rental sector special
It’s not been an easy few years for the buy-to-let market. The sector, which was one of the hardest hit during the credit crunch, has had to deal with new rules, negative headlines and the biggest tax shake up in its 20-year history.
But what does the future hold for Liverpool’s buy-to-let landlords? Does buy-to-let still have a future? We take a look at how the market has changed so far and what’s in store for 2017.
Words by Christine Toner
What the papers say…
If you were to believe some of the headlines surrounding buy-to-let you’d be selling your portfolio pretty quickly! The mainstream media has been quick to herald the death of buy-to-let in recent months whilst taking any opportunity to lambast landlords as the reason we have a housing crisis.
However, things are not as glum as the national press would have you believe. In fact, according to mortgage lender Paragon’s Private Rented Sector Trends report, landlords are feeling more optimistic about the future now than they were three months ago.
Landlords have always enjoyed significant tax relief on their buy-to-let income. Up until now landlords have only paid tax on the difference between their rental income and the amount of mortgage interest they paid.
As of 6 April, however, all landlords will have to pay tax on their full turnover and tax relief will be capped at 20%, even for landlords who pay 40 or 45% tax.
The move, which was announced in George Osborne’s Summer Budget in 2015, will have a significant impact on landlords’ profits and a number have left the sector as a result. According to a survey by property management group Orchard and Shipman, 18% of landlords plan to sell up as a result of the impending changes.
Rules and regulations
Unlike residential mortgages, buy-to-let is unregulated. However, that has changed somewhat in recent years.
So-called consumer buy-to-let is now regulated by the Financial Conduct Authority. Accidental landlords come under this category – for example those people who rent out their house as opposed to selling it because they have to move for a job or change of circumstances.
Meanwhile new rules from the Prudential Regulation Authority (PRA) came into play in January of this year affecting all buy-to-let mortgages (excluding those taken out by limited companies, more on that later). These new rules affect the way lenders underwrite mortgages and, namely, the amount of rent a landlord must be able to make on a property, in relation to their mortgage repayments.
All lenders have a rental cover calculation and as a result of the PRA rules most have hiked theirs. In the past, landlords have generally had to achieve 125% of the mortgage repayment as rent (i.e. the mortgage repayments plus an extra 25%). In recent months most lenders have increased this to 145%. This means landlords have to prove they can achieve much more rent in order to get the mortgage.
The company route
With the changes to tax relief set to come into effect next month and the PRA changes already in play, many landlords are now looking to buy properties as a limited company rather than as an individual. There are plenty of benefits to this.
Firstly, as a limited company you’ll pay corporation tax rather than income tax thereby bypassing the changes to tax relief altogether.
Secondly, limited company buy-to-let is not subject to the PRA rules meaning landlords operating this way can actually borrow more than individual landlords.
This option isn’t without its downsides however, as setting up and running a limited company can be time consuming. Furthermore, changes to the tax-free dividends company directors can take out of a business account were announced in this month’s Spring Budget and will have an impact.
It’s not grim up north
While landlords in Liverpool may feel as hard done by as those across the country, the city – and indeed the North West region as a whole – could actually benefit from the issues facing the buy-to-let sector at present.
As a result of the changes to rental calculations, most lenders have imposed landlords need to look to areas where property bargains can still be had and rents are able to rise. The North West region offers the perfect choice.
According to figures from estate agent Your Move’s buy-to-let index, landlords in the North West achieved some of the highest yields in the country in January at 5%.