Six points buy-to-let landlords need to know going into 2018
Below are six points that landlords or potential investors need to know as we head into 2018 – from house price and rental yield statistics, and new regulatory and efficiency rules, to how to maximise profit and minimise void periods.
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 2018/19 tax year, this figure will drop to 50% and in 2019/20 the figure drops again to 25%, until in 2020/21 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 re-mortgaging to cut their interest costs. 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, 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) New PRA rules for portfolio landlords
New buy-to-let mortgage rules hit 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 Prudential Regulation Authority 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.
3) Minimum energy standards
Landlords have just over six months to ensure their rental properties meet the new Minimum Energy Efficiency Standards (MEES).
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.
4) Immigration checks
Right to Rent checks became a requirement for Landlords in early 2016 and require all landlords to check that any tenant or permitted occupier has the right to be in the United Kingdom. Checks must be made for all tenants, even if they are British, and the most likely documents to check would be a passport and/or a visa. Landlords or agents must check these for each tenant and it is good practice to ask tenants to present passports in person to be sure you’re speaking to the correct people.
If a visa expires during a tenancy then the landlord or agent would be expected to request the updated version, and if there are any concerns raised for either prospective or current tenants then the Landlord or agent should contact the Home Office helpline on 03000699799. Landlord or agents can be fined or possibly imprisoned if they allow a tenant to reside in a property without these checks being performed.
5) Deposit protection
Deposits for most types of tenancies need to be protected in a government-approved scheme and this has been the law since 2007. The money can either be protected in an insurance scheme, where the landlord or agent hold the money and an insurance certificate is issued, or in a custodial scheme where the money is deposited with the actual scheme. Landlords who do not protect the deposit can be taken to court by the tenants and damages of three times the original deposit amount may be awarded to the tenants.
If there is a dispute at the end of the tenancy over deduction proposals from the deposit, the scheme will adjudicate the matter, at no additional charge to either party, though, depending on the scheme, there may be an initial charge for registering the deposit in such a scheme. Landlords be aware though, a common error is that placing the deposit in one of these schemes concludes the matter – it does not. The landlord is also required to serve on the tenants relevant documents at the start of the tenancy and keep records that they have done so. Failure to perform this administrative duty will mean that the deposit is not adequately protected and landlords may be liable to court action from the tenants.
6) Use Airbnb to avoid void periods
Cuts to mortgage interest tax relief are likely to cut into landlords’ profits – but add long void periods into the mix and rental returns could be wiped out returns altogether.
Thankfully there are smart ways to avoid voids and 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 using 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.
Robert Nichols is chief executive officer at Portico and Michael Kennedy is property management director at Portico