BTL Insider Magazine — The Economic Environment, Tax & Regulation

The BTL balance

Editor-in-chief

Beth Fisher

Creative direction

Andreea Dulgheru

Beth Fisher

Senior reporter

Andreea Dulgheru

Contributors

Joe McGrath

Rob Langston

Jon Yarker

Sub editor

Christy Lawrance

Sales and marketing

Beth Fisher beth@medianett.co.uk

Megan Goncalves megan@medianett.co.uk

Photography

Alexander Chai

Special thanks

Roger Morris, Tandem Bank

Helen Lewer, Rhotic Media

Tom Gibson, Uinsure

Carrie Marks, Seddons

Printing

The Magazine Printing Company

Design and image editing

Russ Thirkettle, Carbide Finger Ltd

BTL Insider is published by Medianett Publishing Ltd

Publishing director

Beth Fisher beth@medianett.co.uk

Office K5, 1 Burwood Place, Marylebone, London W2 2UT

0203 818 0160

Follow us: Twitter @BTL_Insider | Instagram @BTLInsider

our years ago, when many were sure of the demise of print, Medianett Publishing went against the grain by launching Bridging & Commercial Magazine—a quality staple read by thousands within the specialist finance community that offers truly educational and unrivalled content about the market. Since then, the industry has witnessed scores of changes in the BTL market, significantly impacting landlords, brokers and lenders alike. Thus, we realise that now is the perfect time to give this particular sector the sole focus it deserves— and so, please welcome our brand-new, quarterly sister publication BTL Insider Magazine Launching a new print product is never easy; our small, but mighty team worked the best part of 2022 researching the BTL space, surveying hundreds of professionals about their appetite for such a magazine (it was a resounding ‘yes’), and interviewing and learning with numerous experts—all with one goal in mind: bringing intermediaries and landlords the inspiring and thought-provoking original stories on the latest and most relevant topics.

Our mission is to keep our readers updated on the news that matters and, not ones to shy away from digging deep, we are excited to put the industry’s zeitgeist under the microscope with the help and support of BTL specialists and you, the reader.

Our market survey found that the majority of the specialist finance sector believes a magazine dedicated to BTL will be invaluable to brokers and landlords, with government regulation announcements, guides to EPC changes, high-level education, and the shifting landscape between consumer and professional BTL landlords, being top of the list. With the BTL sector plagued by the conveyer belt of Bank of England base rate hikes, stricter stress testing, and numerous legislation plans, it is only fitting that our inaugural issue shines a spotlight on the current economic environment, tax and regulation within this sphere. This is why, for our cover story, we gathered 11 specialist finance experts to dissect the latest rules and proposals and investigate how these may hinder—or, indeed, provide opportunity in—the BTL sector [p28]. In addition, our ‘mindmap’ section showcases how brokers are navigating the multitude of product changes [p46], and why Hope Capital decided to brave the tumultuous waters and introduce its bridge-to-let and term-to-rent proposition [p6].

We also delve into the ongoing trend of landlords incorporating their properties into limited companies [p40] and find out how far the industry has come towards professionalisation [p12].

With the ever-evolving BTL market, we feel it is important to highlight two specific areas that play a vital part in it: securitisations and their resilience despite a volatile rate environment [p16], and valuations—including the factors that are presently influencing the final numbers [p20].

It is not an exaggeration to say we have poured our hearts and souls into this magazine, and we hope you are just as excited to read the first issue cover to cover and join us on our new journey. Get ready for years to come of intelligent, insightful and informed content.

Beth Fisher Editor-in-chief

News

A new player enters the bridge-to-let ring

Feature

Are amateur landlords a thing of the past?

Insight

The ins and outs of BTL securitisations / Calculating value

Cover story

BTL legislation: whose side is it on?

Spotlight

To incorporate, or not incorporate?

Column

Why basic insurance can leave gaps in your protection

Mindmap

p12

Larger landlords have very few voids because they know the market and their tenants so well”

Words by Andreea Dulgheru

Hope Capital enters bridgeto-let market

Following the launch of its new Bridge 2 Let and Term 2 Rent products, Hope Capital’s sales director Roz Cawood discusses the options’ flexible features and the lender’s expansion plans for the months ahead

Only a week after the Bank of England increased its rate in February, Hope Capital made waves in the market with the introduction of two products— Bridge 2 Let and Term 2 Rent—to boost its specialist finance proposition.

The new Bridge 2 Let option offers loans of between £150,000 and £1.5m at up to 75% gross LTV, with rates starting from 0.72% per month. The product caters for UK, foreign national and expat borrowers, and is available for a range of properties in England, Wales and Scotland, including residential, commercial, semicommercial, HMOs and MUFBs. Borrowers can secure this product on a loan term of up to 36 months; 12 months is allocated to the bridging facility, with the remaining 24 months for the term loan. However, Roz explains that borrowers can swap from the bridging option before the 12-month mark, should this be better for them. The minimum loan term for the bridging portion is three months.

Meanwhile, the Term 2 Rent offering is designed for the same borrower profile looking to acquire or refinance incomeproducing, commercial or specialist residential assets (including HMOs and MUFBs), who don’t want to be tied into long-term lending contracts with large ERCs. It provides loans from £150,000 up to £1.5m at a maximum LTV of 70% (net of Hope Capital’s facility fee), for properties in England, Wales and Scotland. Borrowers can opt for a variable-rate option, with pricing starting from 6% plus Bank of England base rate per annum, or a fixed rate from 11.5% per year. Roz explains that this is more of a hybrid product, as the loans are underwritten as a bridging facility, but will have an annualised rate paid monthly, similarly to a BTL mortgage.

ICR

sidelined

Perhaps the biggest selling point is the lack of ICR calculations—something causing problems for borrowers lately. “A lot of people are struggling now

because rents haven’t been going up in line with interest rates. You’ve also got people coming off their fixes who are struggling to refinance if they can’t meet the ICR calculation. For our products, you only have to cover 100% of the monthly payment. Of course, the property needs to be income producing, but you don’t have to service the loan from that property alone. If you’ve got a BTL portfolio or other income streams, and as long as you can demonstrate serviceability, we can use that for our calculations,” clarifies Roz.

In addition, the Bridge 2 Let proposition allows AVMs and desktop valuations for the bridging portion of the facility, as well as the ability to opt for dual representation for auction purchases. Roz believes both of these are valuable qualities of the new products and will boost the speed of completion.

For deals that use the bridging side of the facility to carry out property refurbishment, Hope Capital will conduct

Most products are five-year fixes and some people are reticent about opting for this when they’re unsure of where the market’s going to go”

a site inspection to make sure the works are complete before moving to the term loan. Roz tells me this can bring additional opportunities for borrowers; Hope Capital uses the GDV of the property, as opposed to the initial valuation, which means borrowers could potentially raise extra money if they can prove the property has increased in value. Why launch now?

As we chat about the finance provider’s new range, Roz divulges that the idea was something the lender had been contemplating and working on in the background for a while—going back to when she joined the business in June 2021. “We did a lot of research at the time, but [launching them] didn’t really fit with our strategy at the time, as we were concentrating on other products. But it seems like now is the right time to bring them out.”

The reason why February 2023 was the opportune time was based on various factors, she explains. Hope Capital saw a number of lenders that were already operating in the bridge-to-let space temporarily or permanently pulling their products on the back of the interest rate volatility following the mini-budget. “[We’ve seen] a lot of lenders withdraw their products, perhaps because it was too difficult to work out what a good rate would be,” says Roz. The second factor was borrower demand for products with not only a more flexible ICR calculation, but shorter-term facilities as a result of market unpredictability. “With the likes

We’re looking to grow in all areas of the business in order to meet our plans—the last thing you want to do is bring out new products and increase the appetite for brokers, only to then not be able to deliver on it with service”

of semi-commercial and commercial properties, [most products] available at the moment are five-year fixes, and some people are reticent about opting for this when they’re unsure of where the market’s going.” This means that property investors are looking for shorter-term loans in a bid to keep an eye on the market and fix at a later time—when rates might go down—to potentially secure a better deal.

Roz also hopes the new products will allow the lender to retain clients for longer, as the Term 2 Rent option can and will be offered to existing clients who may not be ready to exit their original bridging loans, but fit the criteria.

Products in the pipeline

With the offerings now available to brokers and borrowers, Roz is optimistic that both the Bridge 2 Let and Term 2 Rent options will open a new market for the company. While she emphasises there are no specific lending targets, both Roz and the team hope to see the number of loans completed via these new products contribute to 10% of its overall business in 2023.

Furthermore, the lender has plans to expand its team this year, having already grown the sales division to eight people in 2022. Hope Capital is now keeping an eye out for new underwriters and senior underwriters. “We’re looking to grow in all areas of the business in order to meet our plans—the last thing you want to do is bring out new products and increase the appetite for brokers, only to then not be able to deliver on it with service,” says Roz.

The finance provider is also gearing up

to launch its new ground-up development offering, following a pilot that lasted a few months. Surprisingly, Roz tells me the proposition was meant to be brought out last September, but was postponed in the aftermath of the mini-budget. “We were in a fortunate position that we could hold our pricing because we are forwardfunded. So, when interest rates started to increase and everybody followed suit by putting their rates up, we held ours where they were. That resulted in us doing as much business in a week as we were previously doing in a month, which contributed to the big growth we had last year; we saw our lending increase by 144% in 2022. Therefore, it didn’t seem right to bring out a new product while all that was going on. Everybody was working very hard to deal with all the enquiries and new business coming in.”

Now, Hope Capital is focusing on identifying the best time to introduce its ground-up development offering. “It’s more or less ready to go—it’s just finding an appropriate time for that to be launched.” Roz also hints that the lender is considering unveiling a standalone second-charge proposition as well—though she says this will be much further down the line.

Overall, Roz is optimistic that this year will be kinder to the market compared to the past 12 months. “With interest rates hopefully beginning to stabilise, at least it will be a little calmer. It’s going to be an interesting year, but I think it will be a positive one.”

Along with our ability to provide a decision in principle in minutes, our buy to let range can support a variety of needs with key criteria including:

5-year fixed assessed at pay rate

Top slicing available from 110% ICR across the range

Options for personal ownership, HMO, limited company and portfolio landlords

BUSINESS THE

INTERMEDIARY DIRECTOR ADRIAN MOLONEY TALKS ABOUT THIS SHIFT

Over the past few years, there has been a rapid and significant rise in the number of landlords investing in property through a limited company. Nearly half (49%) of landlords responding to a December 2022 poll on GetGround said they had first invested in property via a limited company within the previous 12 months, while 42% had done this for the first time in the past 1-3 years. It found that approximately three out of four landlords operating in the UK have used a limited company when investing in at least one of their properties.

These figures are supported by the most recent Hamptons data from October 2022, which revealed that the total number of companies set up to hold BTL property passed 300,000 for the first time—meaning that the total number of BTL companies has doubled since 2017.

This rising number of property investors incorporating their portfolios in this way could be described as a shift towards

‘professionalisation’. However, according to Adrian, owning BTL property in a limited company is not the only factor that defines a professional landlord. In his view, this is someone who considers it as their fulltime job and is running their investment properties as a fully-fledged business.

Another element is a continuous desire to grow portfolios whenever there is an opportunity—a trend reflected in OSB Group’s inaugural Landlord Leaders report, published in November 2022, which showed that 80% of full-time landlords planned to increase their portfolio size compared to 40% of part-time landlords.

Based on this definition, the BTL sector is indeed witnessing a trend towards professionalism—an opinion shared by many brokers and landlords themselves. The Landlord Leaders research found that 73% of brokers and 64% of landlords believe the sector is becoming more professional.

THE BTL MARKET IS BECOMING MORE PROFESSIONAL, LED BY LARGER LANDLORDS WHO UNDERSTAND THE MARKET AND ACTIVELY INVEST IN THEIR PROPERTIES. OSB’S GROUP

BUSINESS OF BTL

Words by Andreea Dulgheru

Knowing your market

Adrian believes that certain benefits come with this, one of the biggest being the greater level of knowledge and experience that professional landlords hold. “That’s not to say there aren’t good part-time landlords out there, but what you find with a professional one—and certainly we do—is that they know their market,” explains Adrian. “Our HNW team, which looks after our larger landlords with multimillion-pound loans, engages with these borrowers constantly, so we get to see and review their property stories. They have very few rental voids because they know the market and their tenants so well.”

As they depend on their BTL portfolio for a living, Adrian strongly believes that professional landlords actively educate themselves about changes in the sector. On top of this, he notes that they are more engaged with their brokers and lenders. “Most successful landlords have a strong relationship with their brokers when it comes to looking at what’s happening with interest rates and lenders’ criteria changes. They establish relationships with these experts to make sure they’re fully aware of what’s coming down the line and what might affect their portfolios and rental income because, for a large number of these applicants, this is their livelihood.”

What also makes this type of investor stand out is their dedication to providing accommodation of a high standard— something which tenants have been increasingly demanding for. Some 29% of professional landlords say they are driven by the impact they will have on the lives of their tenants and those around them, according to the OSB Group report. “Professional landlords enjoy a high degree of tenant loyalty, as they have that embedded relationship,” states Adrian, adding that professional landlords are able to swiftly handle any issues with their property or tenants, such as repairing or upgrading their rental homes, or having been able to allow temporary rent discounts or holidays during the pandemic to support struggling tenants.

LANDLORDS ARE TO SEE WHETHER EPC TARGET DATE BE SET IN STONE OR DELAYED, WHAT THEY’RE REALLY DOING

FOR THIS”

WELL IS PREPARING

Ready for the green light

Professional landlords’ awareness of changes within the BTL market is also reflected in their efforts to make their stock sustainable to meet possible government targets. As the government is still assessing its proposals to raise the minimum EPC rating for private rental homes to C by 2025, property investors are keeping themselves informed of any updates to prepare for the potential adjustment. “At the moment, landlords are waiting to see whether that target date will be set in stone or will be delayed, but what they’re really doing well is preparing for this,” shares Adrian. “They’re looking at their assets and researching what improvements need to be made, how much that would cost, and how long it might take.”

ARE WAITING WHETHER THE DATE WILL STONE BUT THEY’RE DOING PREPARING

Some are ahead of the curve, with 40% of those who participated in the Landlord Leaders report saying they had already invested in environmental upgrades, while 35% plan to do so in the near future. Not only that, Adrian tells me that professional landlords who are looking to expand their portfolios are considering buying energyefficient properties that already have an EPC rating of C or above. “Sustainability is very much on their agenda, but the professional sector needs and is waiting for confirmation of whether, and exactly how, the new EPC regulations will be implemented, and if there will be any exemptions to the rules. As a lender, we also want to know so we can support these landlords through the journey.”

Financing future demand

While professional landlords are keen to continue investing in BTL, is there enough finance available from BTL mortgage providers to support these aspirations?

Adrian believes there is indeed plenty of product choice, albeit a lot of them are fairly similar. He also notes that lenders who don’t offer product transfers for landlords coming out of their initial fixed-term BTL mortgage might struggle to retain their customers, as borrowers tend to look for this extended partnership with their lender. Ultimately, this boils down to supporting landlords in the long term and building a level of trust with them. “Being able to support landlords at the end of their product term brings additional value and has always been a big part of our model,” says Adrian.

As for the future of the BTL market, Adrian is confident that the demand for private rental homes will increase in the near future as people continue to struggle to get onto the housing ladder— particularly first-time buyers following the end of the Help to Buy scheme. “More people will continue to turn to the private rental sector, but what they demand is high-quality accommodation to live in. The professionalisation of the sector supports that, because those landlords understand the demand, and they have the revenue and the know-how to provide that accommodation.”

Adrian Moloney

insight

and capital

Securitisation is helping BTL lenders to free up capital and transfer risk, but high interest rates could pose a threat

Words by Rob Langston

has a well-established role in financing the UK residential mortgage market, providing capital for loans and income-paying investments for investors.

While it was considered a factor in the global financial crisis of 2008, assets such as residential mortgage-backed securities (RMBS) have become more widely used and bolstered by regulators.

Securitisation has played a crucial part in helping to release more cash in the BTL space. It allows loans to be bundled and sold into capital markets to investors as a source of income and into different tranches to meet a range of risk appetites.

Typically, securitisation has been used by specialist lenders—such as LendInvest, Together, Lendco and Pepper Money, among others—which do not have the deposits of a bank to fund loans. It therefore increases the range of independent non-bank lenders that borrowers can choose from.

More recently, some banks have been using securitisation to transfer risk from their balance sheets, says Rob Ford, founding partner of TwentyFour Asset Management and a portfolio manager in its asset-backed securities team. “If a bank originates £500m of mortgages and puts those into a securitisation vehicle— typically a special purpose vehicle (SPV) [that] sits away from the liabilities of the bank—conventional debt holders within the bank will not be exposed to those assets, nor have recourse to them,” he explains. “The cashflows from those underlying assets—the principal and interest payments—belong entirely to the note-holders buying individual bonds issued by that bankruptcy-remote vehicle or SPV.”

A deteriorating outlook?

The rising interest rate environment is one of the biggest challenges for the BTL securitisation market. Against a backdrop of higher inflation, central banks worldwide have raised interest rates to levels not seen in many years. In September 2022, Fitch Ratings revised its performance outlook for UK BTL RMBS from “stable” to “deteriorating” on expectations that high inflation would lead to falling real wages and mounting interest rates would result in increased monthly instalments for borrowers.

However, S&P Global Ratings recently noted that, although BTL tenants are not immune from inflationary pressures, landlords’ ability to replace non-paying tenants provides some insulation from broader risks to the economy. Research by DBRS Morningstar’s Ketan Thaker, managing director and head of European RMBS and covered bonds, and Alejandro Tendero, assistant vice-president of European RMBS and covered bonds, found BTL mortgages were less likely to see rate changes within the next two years, as many had already introduced longer fixed-rate periods that will not be revised for another two to three years.

However, these could rise again once those terms end, unless rates, in general, begin to fall. The pair warns that landlords on interest-only BTL mortgages—which they estimate make up 90% of the BTL mortgage market and have an interest rate of 2.5% on average—are at risk of seeing servicing costs double or triple if interest rates climb significantly. Nonetheless, many of these are in a fixedrate period and have a longer time to reset than owner-occupied mortgages.

“Overall, our view on BTL in the UK is that there has been good credit performance and the underwriting is of good quality,” says Ketan. “Having said that, BTL faces a bit more stress than owner-occupied, because the mortgage rate increases we have seen are a bit more significant—while rents have gone up, they are unlikely to go up as quickly as mortgage rates. But most borrowers will be OK because house prices have gone up and, because of that, the LTV may not be very high. The most difficult situation will

be for landlords with relatively high LTVs where the rent coverage is not as good.”

A rising rate environment would usually be problematic for borrowers. However, some of the nuances of the BTL sector (such as typically longer-term loan periods and higher deposits, plus recent regulatory initiatives, such as the PRA’s underwriting standards and work on interest coverage ratio) have helped to make it more resilient and better equipped to deal with the changes. This means individual loans may be less likely to experience default, increasing trust in BTL securitisations and fuelling demand.

“The biggest issue is with lenders keeping up with the movements in rates and having to hedge their pipelines while interest rates are changing,” says Rob. “In BTL, most mortgages tend to be five-year loans nowadays. Seven or eight years ago, most loans used to be twoyear facilities. That comes from some of the regulatory changes which have been imposed. In particular, lenders’ interest coverage ratio testing is marginally more favourable for five-year borrowing, even if it is more expensive. If you take out a loan for two years, you’re exposed to what is going to happen to interest rates, whereas if you take out a loan for five years, you’re fully locked in, even if interest rates start to move in the middle.”

Greater appetite

As the fallout from September’s minibudget has settled and the outlook on inflation has started to improve, appetite for BTL mortgages remains strong. This could mean more securitisation activity.

“The second half of 2022 was difficult for public and private capital markets,” shares Hugo Davies, chief capital officer at LendInvest. “You had pretty much every single macroeconomic headwind and unforeseen events, which made capital markets a very difficult place. There was the additional pressure of very high inflation, tackled through monetary tightening, which lifted expectations for interest rates. If you were a mortgage lender borrowing on a floating basis to lend out fixed, it was a difficult relationship to balance without interest rate risk-mitigating tools, such as pipeline hedging, which small platforms wouldn’t have had in place.”

Hugo adds that, coming into the new year, there has been a fundamental shift in the tone of conversation. “Everyone is far more positive about the outlook. Securitisation markets have opened up, and there have been a number of transactions in UK mortgages. Looking at sourcing systems, they will tell you there is an incredible amount of demand [from borrowers] for BTL mortgages.”

Demand is also high among institutional investors, which continue to look for low-risk, income-paying assets offered by securitised BTL loans, says Rob. Much of the RMBS marketplace is issued as floating-rate

notes, which offer an attractive alternative to fixed-rate corporate bonds. “Every time [Bank of England governor] Andrew Bailey comes along and adds another 25, 50 or 75 basis points to the base rate, the coupons on our floating rate immediately go up, and that is clearly very attractive to investors [that] believe interest rates may continue to rise,” he says. “The default rate in this product is as close to zero as you can get when you get into the bonds themselves, because of the structural protections and the levels of underlying cash support. At the more senior levels, there has never been a default of any kind, and I’m not

even sure that anything has defaulted in the investment-grade spectrum. It is a very different world, and lending criteria over the past 10 years have changed completely.”

A more robust regulatory regime for securitisations and high confidence in such assets contribute to healthy demand for the loans from institutional investors. This should help make it easier for lenders to finance their lending activities, ultimately leading to healthy competition among BTL finance providers and attractive offerings for brokers and their clients.

The biggest issue is with lenders keeping up with the movements in rates and having to hedge their pipelines while interest rates are moving”

FORWHAT IT’SWORTH:RENTSANDVALUES

WordsbyJoeMcGrath

Departing landlords, rising rental demand, slowing house price growth and higher sustainability demands are presenting a unique set of considerations for BTL valuations this year

The final months of 2022 created a fascinating landscape for BTL valuations. While property price growth was slowing, rents were rocketing.

According to Zoopla, house price growth slowed considerably in H2 2022 and prices are predicted to fall in H1 2023. At the same time, large numbers of landlords quit the BTL sector at the end of last year, following the withdrawal of mortgage tax relief and the end of the government’s stamp duty holiday. This resulted in fewer properties on the market and higher rents.

These two trends matter in the world of BTL, because residential properties are typically valued in two ways: first, you have the market value, which surveyors assess by considering local sales activity for similar properties. This allows a surveyor to weigh up the supply and demand in the vicinity.

Second, there is the investment valuation, which is based on the asset’s rental value. This is informed by appetite in the local area at the date of valuation. It is important to note that a slower buyers’ market does not necessarily equate to a quieter rental one.

“The market value of any property should reflect the price achievable on the valuation date and, naturally, this will fluctuate

depending upon market conditions, demand, sentiment and availability of finance,” says Andrew Murdoch, valuation panel director at VAS Valuation Group.

On top of this are factors such as the property’s condition, layout, fittings and improvements required. Compounding this is the issue of planning. For HMOs or properties that could be converted into one, having planning consent for this has a core influence on the property’s valuation.

A BTL C3 property—a regular flat or house—with permission for use class C4 (HMO) may be seen as more attractive to a prospective investor, resulting in a higher valuation. Generally, you can convert a C3 property into a C4 without a planning permission—as this falls under permitted development rights. However, it is still recommended to obtain a Lawful Development Certificate to formally confirm the change of use is classed as a permitted development. In short, it pays to have the paperwork.

Nonetheless, there are few hard and fast rules in BTL property valuation, with the lender and surveyor each having a subjective sway in the overall outcome— and asset owners can be dissatisfied if the final value falls short of what they had hoped for, notes Andrew.

“It is natural for owners to have an optimistic view of their property’s market value and be disappointed if the reported value does not reflect their opinion,” he says. “However, a valuer has to provide an independent opinion to the lender that reflects current market conditions.”

Remote inspection

To ensure their valuations are reliable, surveyors have been embracing technology and harnessing new methods to protect client service levels and maintain precision. Being able to provide accuracy and speed together is becoming increasingly important given recent market fluctuations.

Simon Jackson, managing director at SDL Surveying, explains that the valuation of BTL property has evolved with advances in data and technology, and also reflects recent upgrades to legislation on property safety and standards. In September 2022, the government issued its Decent Homes Standard

“It is natural for property owners to have an optimistic view of their property’s market value and be disappointed if the reported value does not reflect their opinion”

consultation, with the aim of improving privately rented housing. It outlines what tenants can expect in terms of conditions, state of repair and facilities within a property.

Simon notes that not all surveys are done on site: “Many BTL properties are still inspected in person, but if the property is a standard type and adequate data exists, then a lender may sometimes request a desktop assessment, or obtain an automated valuation model (AVM), where capital and rental values are calculated by the algorithm, with no physical inspection carried out.”

Typically, desktop valuations—which are carried out by surveyors—are based on data and photographs. Historically, these have not been common in the BTL space, but are starting to be used for cases with lower LTVs. “Both of these

methods of valuation are typically quicker than a traditional inspected valuation, although they are less likely to identify defects or issues with the structure of the property,” Simon says, which potentially runs the risk of additional costs down the line.

The uptick in desktop valuations has been one

“Desktop valuations are typically quicker than a traditional, inspected valuation, although they are less likely to identify defects or issues with the structure of the property”

of the most significant developments in recent years, says Ben Culley, property risk manager at Aldermore. He comments that new technologies such as AVMs played “an especially vital role during the coronavirus pandemic”, when physical valuations were temporarily stopped by government restrictions.

In the wake of the pandemic, the remote approach has remained, Ben says. Photo-

assisted desktop valuations, where owners provide photographs to the valuer as part of the assessment, “continue to be explored” and he expects to see “greater use” of this over the coming years. For example, companies are already carrying out roof inspections using drones. “Lenders have traditionally relied on physical inspections for BTL applications; however, following the increased use of desktop valuations and with the wealth of data available, more are now using or exploring the use of nonphysical assessments for BTL properties.”

When to be wary

The speed of an AVM or desktop valuation is important in a market that is fluctuating, especially when compared to the time taken for a full inspection. Nonetheless, there are limitations, according to Helen Scorer, operations director at Pure Panel Management. “An AVM gives an average price for a wide variety of property styles, sizes and conditions, but it may not take into account positive changes to the

“Meeting energy-efficiency standards is going to be a costly exercise and is likely to have an impact on the whole sector in terms of rents, yields and future investments”

property, such as extensions or new fittings, as well as negatives, such as defects.”

Helen says surveyors are especially wary when data sets relating to the property are old or not up to date. “In a physical valuation, the surveyor will be looking at the condition of the comparable evidence and matching it with the subject property to produce a more accurate figure,” she explains. “Most importantly, a physical inspection of the property will highlight significant defects to help protect the lender from a risk perspective.”

Energy efficiency is critical

An additional headache landlords are dealing with is the government proposal to increase the minimum EPC rating for residential BTL properties to C.

“It’s a bit of an unknown,” states Peter Greig, head of real estate at OSB Group. “We think we know the direction of travel, but the government is yet to confirm the timeline. Landlords will not want to go investing earlier than they need to because of possible impacts on their margin. At the same time, landlords won’t want to leave it too late as spreading the cost might be more palatable—plus resources may become limited closer to the deadline. Landlords are also very aware of the costs currently being faced by their tenants, so they will be looking at making changes to help their tenants and have better-rated stock which could remove some of that risk element.”

John Baguley, director of technical, risk and compliance at Countrywide Surveying Services, explains that understanding the energy efficiency rating of each asset is now crucial. By not knowing, BTL investors risk owning assets “unsuitable

for BTL within a couple of years”, he warns. “The EPC itself has limitations, and its reliability continues to be questioned. But, as it is the established mechanism by which to assess a property, it’s the benchmark to which we must operate.”

Essentially, landlords will need to factor in how much they need to spend on bringing new properties up to the proposed minimum standards, as well as updating their existing stock. “This is going to be a costly exercise and is likely to have an impact on the whole sector in terms of rents, yields and future investments,” Helen adds.

Greener home, higher rent

With tenants and buyers also becoming increasingly aware of the energy efficiency profile of properties and seeking buildings that perform well, John claims this is starting to translate to better rents and values, with landlords tapping into tenants’ desire for energy efficiency alongside the value that this can add to the property.

Research by Shawbrook Bank found that 58% of tenants would be less likely to consider a property with an EPC rating of D or below—a fact that has spurred more than half of landlords to make energy-efficiency improvements in the six months up to October 2022. These views are echoed by Douglas Lloyd, head of lettings and associate director at Finders Keepers, an Oxfordshire-based management agency, who says that tenants are becoming discerning due to the rising cost of energy prices and overall cost-of-living pressures facing Britons.

“It is highly topical. If you have two identical properties and one is energy efficiency rated A and the other is C, they are going to go for A,” he states. “In Oxford, people are very mindful of it. We have a development that has an Archimedes screw—a turbine that can generate its own electricity. That is a huge selling point for any tenant.”

Residential assets with an A+ rating, such as the one noted above, remain relatively rare and have had limited effects on BTL

valuations to date. However, that is starting to change; Simon believes the market could look very different in the near future: “We are likely to see increased rents for more energy-efficient homes and, potentially, those below a certain standard will not be eligible for the rental market.”

For BTL investors, there is a case to be made for green premiums existing within the valuation process. Analysis by Knight Frank found that a 3% premium could be added to homes that have moved from an D to a C rating. Based on average resale values, this equates to a little over £9,000.

It is in homes with a large degree of improvement where the greatest premiums can be seen. A home moving two bands from an E to a C can expect an uplift in value of 8.8%, while those moving from an F/G can gain an additional 19.6%. However, it remains unclear if—and how—this is translated to the BTL valuation process.

Rents vs prices

Despite the effects of sustainability trends, surveyors agree that house price growth is likely to remain muted during the first half of 2023, although rental demand is expected to increase.

“More people will be looking to rent properties,” says Sophie Naessens, a valuation panel manager at OSB Group. “People are more clued up and will be looking for landlords who can meet their expectations. The rental market will be buoyant, but the stock will have to move with that too. If landlords don’t invest in their properties, those properties will likely fall away.”

While challenging market characteristics are expected to force further innovation in valuation methods, approaches will remain “an art and not a science,” according to Andrew. “Getting a local, experienced professional to inspect the property and value based on their vast experience will still be needed to protect a lender and make sure they are lending off accurate values.”

Has it too far? tipped The BTL balance:

Major changes in legislation affecting privately rented housing have recently come into force, with further moves on the horizon. We question whether it is still worth it for landlords

Words by Andreea Dulgheru

Photography by Alexander Chai

Tax and regulation have become major topics of discussion in the BTL market. From amendments to mortgage interest relief to the proposed ban on section 21 no-fault evictions and extending the Decent Homes Standard to the private rented sector, changes have left landlords, brokers and lenders wondering: what impact will this have on the industry?

On a cold Friday morning, we gathered 11 BTL experts—Juliet Baboolal, partner at Seddons; Jeni Browne, sales director at Mortgages for Business; Ed Zneimer, associate at Seddons; Mike Cook, chief mortgage officer at MFS; Lucy Barrett, managing director at Aria Finance; Andrew Ferguson, managing director for BTL at West One; Andy Virgo, sales director at CapSol Finance; Kim McGinley, managing director at VIBE Specialist Finance; Chris Morris, director at Goldbridge Partnership; Nick Simmons, managing director at The Finance Company; and Emily Hollands, head of specialist finance at OSB Group—to find out the answer to this burning question.

Andreea Dulgheru: We’ve seen quite a few tax and regulatory changes recently; some have been implemented, and others are still at the proposal stage. Of all these, which one do you think has had the biggest impact on the market—or has the potential to make the largest waves?

Jeni Browne: From speaking to our clients, the one that has caused the most upset is the abolition of section 21, because they rely on that more heavily than using the section 8 core eviction process—they find it to be more effective and less costly. The removal of this makes them feel incredibly vulnerable in terms of how they will be able to get their properties back in the event they need to remove tenants.

Lucy Barrett: Yes, we’ve seen that a lot, as well. I think customers feel the raft of changes to the BTL market as yet another thing thrown at them. They feel a bit victimised and it hampers them from being able to run their business as they want to. Landlords feel this will remove their flexibility and ability to do something they want to with their business. In reality, they never would have put the tenant in jeopardy anyway, as they want to treat them fairly. Section 21 is just allowing them that control of their business.

Andy Virgo: If you look at the rule, it’s good for tenants to have that surety that if they’re a good tenant, then they would remain in situ. If a landlord has a rogue idea to move a property on and evict a tenant, it gives them some rights, which is great for them. I think the problem could arise if HMO operators have some rogue tenants. Let’s say you’ve got an eight-bed HMO and seven great tenants, but one who’s not behaving the way they should be, upsetting everyone. If a landlord can’t move that rogue tenant out due to the section 21 abolition, they could be losing seven good ones.

AD: With the section 21 ban proposal, the changes they’ve made to section 8 also come into play, which are supposed to help with this issue. Does it truly

Ed Zneimer

help landlords, or is it just a poor attempt at keeping the balance?

Juliet Baboolal: I think it needs to be tried and tested, and that’s the problem. When you serve a section 8 notice, there’s no guarantee that when you get to court things will work in your favour. That tenant, for example, can come up with a bit of payment, which then throws the entire case out. Whereas with a section 21, it’s what we call a no-fault notice— basically, the judge’s hands are tied. If the case went to court, you would be guaranteed possession of your property, but that security has been removed with the new proposal. The improved section 8 has not been tried and tested, and landlords feel a bit miffed because they’re exposed. I’m not quite sure the new grounds replicate or give us the comfort that a section 21 does—including from lenders’ perspective where they want vacant properties if they repossess. Section 21 gave us that security because, even if we didn’t get possession immediately, we would get it eventually whereas, with section 8, it’s very much dependent on the judge that you get on the day. If a county court judge says they’re not giving possession orders that day, what you get instead is a new hearing date, which just delays the process.

AD: Would you say that the delays in the legal process with section 8 is the biggest problem landlords have at the moment?

Juliet B: Yes, and the lack of security with the section 8 process. If you’ve got a crafty tenant who knows the system, they can play it, which is a problem. On top of that, with section 8, you’re entitled to claim arrears, but a lot of landlords don’t want that—they just want the tenant out. That should be something that both the tenant and landlord are in agreement on at beginning of the tenancy. So it just seems one-sided in terms of the way the legislation is going.

Michael Cook: One of the last surveys that MFS did revealed that about 40% of landlords had at least one tenant they wanted out, but felt they couldn’t or

Mike Cook

didn’t have the means to do this. With the section 21 ban proposal, I think the intention is good; people want security. And, if a landlord does want to exit the sector, they can still do that—the assured shorthold tenancy has an end and, let’s face it, you can’t exactly sell a property within a month these days, anyway. It takes six months, realistically, to go through conveyancing and everything else, so you’ve got plenty of time to give adequate notice if you want to sell a property. However, if you do too much interfering, it just has a negative effect, and landlords might leave the sector.

AD: So rather than banning section 21 evictions, what would be the alternative solution that would benefit both landlords and tenants?

AV: Probation. Give a tenant a probationary period for their tenancy of six months or however long you want it to be to prove themselves to be a good tenant. And at least the landlord then has a degree of flexibility to review.

LB: It could be quite subjective, though, couldn’t it? If you look at it in employment terms, does the employee believe they weren’t good if they don’t pass their probation, even if the employer does? And who determines that? So, actually, that probably gives tenants fewer rights; if a landlord says they don’t like how a tenant kept the kitchen, does that make them a bad tenant? Who decides this?

Jeni B: I personally like it. I’m currently going through a process of trying to evict my own tenant who hasn’t paid rent, so I served both section 8 and section 21 notices. We had our court hearing through for the section 8 date for 7th March but, unfortunately, the tenant’s then gone into something called ‘breathing space’ via the Debt Respite Scheme, so now I can’t touch them for 60 days. And, even when they come out of the breathing space, I then have to wait two weeks before I can re-serve the section 8 notice. That will then go to court, so I’ll have to wait

for my new court date—which could take between six weeks and three months. If the judge rules in my favour, I must give the tenant two weeks’ notice, then I have to wait up to three months to get the bailiff. The whole thing just goes on and on. The reality is, if you’ve got a non-paying tenant, it takes a year to get them out if they don’t want to leave. A year of no rent.

LB: That’s terrible, especially with mortgage costs where they are right now. When you’re paying 5% or 6%, that suddenly looks even less appealing.

Andrew Ferguson: This is a great example of the hassle that smaller landlords are dealing with and the depth of understanding required with all the rules, regulations and issues in the market. This is why we are seeing smaller landlords exit the market and there’s a move towards more professionalisation. Section 21 is obviously all about protecting tenants and giving them rights, but it just feels that the balance is tipped too far. The government needs to recognise the importance of the PRS.

Kim McGinley: From what I’ve read, the government is hoping that the

Andy Virgo

ombudsman they’re setting up will mitigate some of the delays in the court proceedings. It feels like a nice thing to have, but is it going to do much?

Juliet B: I don’t think the ombudsman has been set up to really help the situation— it’s leaned towards the tenants’ side. Looking at the white paper, it’s there to rectify problems that the tenant might have with the landlord. In my opinion, we need bailiff reform—apart from going to court and getting a possession order, we need bailiffs to have the authority to look at your case. Each one is different and not all tenants are bad. You might even have rogue landlords, and that’d be who they want to target. However, the government has thrown all the landlords into one bin and told them they’d get rigorous, draconian treatment.

Jeni B: When we’re talking to our clients, the consensus is that having a housing court set up to deal solely with tenantlandlord disputes would expedite the process. It would mean the people that are running the hearings are specialists in that part of law and will understand it fully and be equipped to deal with it, which should then make for good, fair outcomes, and a quicker process.

LB: The reality is, the government doesn’t want small landlords in the market, and it’s doing everything it can to push them out of it. If the government had its way, it would all be corporate PRS landlords; it is making it difficult for smaller players who have a full-time job and can only commit a certain amount of time to it.

MC: I just don’t know where it stops for landlords. That sector will just get smaller, if we’re not careful.

AD: Going back to your statement, Jeni, that it takes almost a year for a landlord to get a property back. Obviously, if the tenant is not paying rent, then you have a year with no profits. Is there any way that landlords can mitigate this?

Jeni B: In my situation—as my estate agent frequently reminds me—you

should take insurance. I think my big learning out of all of this is that insurance is really important.

LB: It’s expensive though, isn’t it?

AF: It probably shifts you into unprofitability, actually.

Jeni B: The house that I own is never going to be a good investment from a yield perspective, because of where it is [Sevenoaks, Kent]. This wasn’t a business decision—I used to live in that house and didn’t want to sell it. So, it doesn’t wash its own face anyway, let alone with an insurance policy. But, I think if you deliberately went into investing as a landlord, this is an idea for people to consider.

Ed Zneimer: But, as everyone said, the legislation is clearly aimed at forcing out the entrepreneurial, small BTL landlord.

Jeni B: Yes, and I think what’s so disappointing is that landlords are really good people. Although there will always be the odd exception, by large, they take real pride in providing good homes, looking after their tenants, and providing a great service. I really don’t understand why people want to get rid of the ‘dinner party’ landlords. What’s wrong with wanting to have an income in retirement?

Juliet B: Or, in your case, that house has sentimental value, which is why you didn’t want to sell it. That was your choice, and you shouldn’t have to sell it because of some rules that have just been written.

MC: And if you do sell, you’ll get whacked by the new capital gains tax.

Jeni B: I did think of selling the house and, when I did the capital gains tax calculation, I thought I actually can’t afford to pay it. It’s awful because you get stuck. We have clients who are stuck with properties they no longer want because they can’t afford to sell them [due to the capital gains tax]. It’s crazy. People are almost forced into these situations.

AD: That brings me to my next topic of discussion, which is the most recent capital gains tax changes that were announced in the Autumn Statement. Do you think we will see a lot more landlords try to get rid of their properties that are no longer profitable before the changes come into force in April this year?

LB: At the moment, it is quite hard to unpick why people are selling, because it’s due to a whole raft of things. While it may be down to the new capital gains tax, if people are coming off really cheap fixed rates, the portfolios just don’t stack up anymore. And if the market is going to be a bit flat for a while in terms of sales values, landlords might think it’s now time to leave. It’s almost like death by a thousand cuts.

AV: Lucy’s absolutely right. There are so many things coming in, and the culmination of all of those are going to force landlords to think whether it’s worth it. It’s death by a thousand cuts for sure. But in some respects, the positive slant on this is that it’s actually encouraging smaller landlords to stay in the market and find a way to make the property work for them.

Chris Morris: I think that the capital gains tax rate changes won’t affect anyone’s decision of whether to sell a property or not. It’s more the fundamentals of capital gains tax and the overall bill that make it difficult for landlords. I heard that about two years ago, there was talk inside the Treasury about abolishing capital gains tax entirely and, instead, charging gains to income tax. The most concerning thing for me is that in the past four budgets, nothing’s really been done about capital gains tax— the government halved the allowance, but that doesn’t mean much—and nothing’s been said about inheritance tax. It makes me think that, at some point, they’ll do something big—and that’s where we will have landlords exiting the market quickly.

Jeni B: I think the other thing worth talking about is the fact that limited companies don’t pay capital gains

tax. What we’re seeing is lots of people looking at incorporation. When section 24 [of the Finance Act 2015] was announced, a lot of people considered this option, but decided to wait. Now that they’re paying the full-blown tax increases and have got higher interest rates, more are looking into incorporation. Obviously, there’s a benefit here—if you push the properties via the correct pathway into the company, then you’re not going to be paying capital gains tax when you do dispose of them in future.

CM: Believe it or not, it’s actually worse off from a capital gains tax perspective. The only benefit of a company, from a

tax perspective, is if you’re not going to spend all the money you want out of the company—so you essentially moneybox it to keep control over the profits that they’ll be generating. If you’ve got a company that’s got property in it, the company pays tax at 19%. If you sell it, the company still pays tax at 19% on the overall gain, but then that money sits in the company. If you, as the individual, want to get that money out, all you can do is liquidate the company. It’s an investment company, so it doesn’t qualify for business asset disposal relief, which means you pay 20% capital gains tax on liquidating to get your shares out. So, in total, you pay 39%, so you’d have been better off paying the 28% gain

you’d have been liable to if you were selling it personally. I’m still a big fan of incorporating BTL portfolios into limited companies if the circumstances are right. But I think there have been a lot of negative publications that panicked everybody into wanting to incorporate. People were coming to me with two or three properties, saying they wanted to stick this in a company, and I’d explain that by the time they factor in the benefit of their mortgage interest relief, they’re looking at a 15-year repayment period for them to get the benefit back on the cost that it’s going to get in the company.

AV: Andrew and I have been talking to brokers for the past few years,

Jeni Browne

highlighting the fact that people need to be aligning themselves with tax advisers to make sure they get the right advice for their particular case, because it sounds like there are so many different scenarios. It’s getting more complicated and tax advice is becoming more necessary. We are seeing the majority of enquiries coming in from limited companies these days. But are landlords simply following the route of everyone else?

CM: The ‘man in the pub’ is my enemy. I can’t tell you how many times I’ve heard someone say they were told to stick their BTL properties in a company

because they spoke to a fella down the pub the other night. I tell them all the reasons why they shouldn’t do it and, a lot of the time, they still don’t believe me because their mate down the pub’s done it. That’s what you’re up against. It just comes down to looking at individual circumstances. We’re always clear with the client and personally don’t work with people who want to try it even if we said no—we tell them to find someone else to do it.

AV: Now we’ve gone from rogue landlords to rogue tax advisers.

Juliet B: We often see these cases when an individual wants to transfer a portfolio into a company—they’re getting a loan, and then the lender asks for the tax advice they were given. There are times when the advice is rogue and wrong. Many go on these consumer forums and read what others are saying and doing, and they just follow carte blanche, or they have people who would put their name out there and claim this is the advice. Then, in three years’ time when it comes to enforcement and HMRC has brought the lender into the whole proceedings, that particular

Kim McGinley

tax adviser has disappeared. So, it’s important to have the right one.

CM: Absolutely. I also think there should be more responsibility on tax advisers because, even when you do someone’s tax return, it’s still selfassessment—if it’s done badly, they will go after the individual. There are a lot of people who are simply filing. This is why we’re traditionally more expensive than someone who might do a tax return for £100, because they’re operating from their house etc and don’t take that responsibility. Part of the reason we charge the fee we do is because we are doing the extra work— we are taking the responsibility.

Juliet B: I think you get what you pay for and, when you try to have these shortcuts in the beginning and you go to a back-street accountant, it will ultimately come back to bite you.

AD: With landlords following the herd and opting for limited companies regardless of whether it’s the right choice for them and taking rogue advice, do you find it harder to advise clients?

AV: The key element is not giving advice on something you don’t know anything about. The most important things you can do are recognising your weaknesses and making sure you are introducing the right people to the right advisers at the right stages of the deal.

EZ: The reality is that some of the advice needs to be more nuanced than that, and you need a specialist.

CM: People never seem to appreciate the difference between an accountant and a tax adviser. You can pass the chartered accountant qualification without doing the tax element. I think one of the barriers is landlords not appreciating how specialist some of this stuff is. And I do get it—if you’re just a regular BTL investor, an accountant should be able to look after you. But when you’re involved in multi-property portfolios and talking about incorporations, restructuring,

potential sales, moving things around and the more complex side of things, there is a need to have a specialist person—and it’s the same with solicitors.

Juliet B: We often get asked the question: what causes a delay in the lending transaction? It’s usually when the borrower has chosen the wrong solicitor because they want to do it cheaply, but that person doesn’t have the experience. It then makes the lender’s solicitor’s job more in-depth and difficult. You’ve got to do your homework in terms of choosing all your advisers, especially with tax. Some of these don’t just have cost implications, but criminal

penalties attached to them, and then that stops your whole business.

AD: Moving on to another proposed regulatory change, we’ve seen the Renters’ Reform Bill circulating recently. One of the things included in that is the plan to allow rent increases once per year, which could hurt landlords. Could this proposal affect landlords’ ability to get a BTL mortgage?

Emily Hollands: I don’t think it’s relevant what rent a landlord charges the customer for the BTL mortgage. The valuation will always provide the rental figure based on OMV, and that’s

Chris Morris

what most lenders would use to base their lending on. It will affect landlords themselves, though. With the cost of living crisis and the pricing of materials to improve properties, there is an option for them to raise the rent, and they should be able to do that. But if it goes to once a year, then that’s going to make it very difficult. They’re going to be in a position where they’re making less money on those BTL properties.

KM: I disagree to a certain extent. Not all lenders will just accept the market rent from valuation. There are actually quite a few lenders, still, that would take the lower of the market rent (confirmed by the valuer) or the passing rent (what the property is currently achieving); landlords might not always get the most competitive option though. From a broker’s perspective, that’s another educational piece for us to understand at the outset, so we’re quoting the right lender that will take the passing rent, rather that the valuer quotes.

LB: In terms of rent increases, we’ve talked a lot about what isn’t fair on the landlord, but I think there have to be some rent protections. You set a tenancy and, like any business, if you charge a price for goods and services, you fix it for whatever period—whether that’s a one-off payment or for 12 months. If it’s a fixed fee, it’s simply that, and I think it’s the same with rent. You sign a tenancy agreement at a set price and, when that tenancy comes up for renewal, obviously, that’s the point when a decision can be made and capped. It would be a bit unfair for a landlord to call up their tenant and up the rent every month.

Jeni B: This is another rule that [doesn’t affect good landlords]. Most don’t raise the rent every month, or every six months for that matter—they are only doing annual increases.

LB: I must be the only landlord in the world whose rents aren’t going through the roof, because I keep reading about the price of rent going up.

MC: It depends on stability and the mortgage costs across a landlord’s portfolio, but if you’ve got a good tenant…

LB: I’ve got good ones and five-year fixes on my mortgages. This comes back to morality—I could whack the rents up but, actually, my costs haven’t gone up. They will at some point in the future, so maybe there is an argument there that you’re starting to offset the future costs but, ultimately, if you’ve got a good tenant, you might put the rent up, [but only] a little bit. I think a lot of responsible people take the same view.

CM: Obviously, the risk of putting the rent up is ending up with a non-paying tenant. If you go down that route, you might not get them out, or they choose to stay and then call you up every month with something that needs fixing. You end up spending more trying to appease them with all the fixes, because they’re upset the rent’s gone up, whereas before they just let it go, because they felt the rent was good value. When you’re looking at renting—and I always see it with clients—their most profitable years are the ones when they’ve had the same tenant long term, they don’t have a lot of repairs, and they’re happy. The ones where you’ve had a tenant out halfway through the year, you end up getting six to eight weeks with no rental income for the gap and thousands of pounds worth of repairs, because you might have to paint a few walls or change a carpet or bed. Then, when you look at the profit and loss on that property for the year, it’s actually made a loss. Surely, it’s better not to increase the rent by £100 a month, as it will cost you more in the end.

LB: It comes back down to the difference between doing it part-time or not. If I did it for my full-time job, maybe I would consider [increasing the rent] a bit more. If this was my only source of income, I’d have to be a bit more business-minded about it. If you’re doing it on the side of your main job and it’s a future savings/ pension type thing, or you had a good opportunity to buy a property, you’re

probably a bit more empathetic and not as focused on the money-making aspect.

AF: I think that’s a good point about the different mindset of an amateur landlord, who is more likely to show empathy and be less fussy about an extra £100 on the rent. A business wants to maximise income so, potentially, one of the downsides of the professionalisation is rents creeping up slightly.

Juliet B: Also, as an amateur landlord, you have that personal relationship with your tenant. Whereas, if you’re a corporate landlord, you’re removed from the situation, so it’s easier to raise your rents.

AD: Going back to the Renters Reform Bill, the white paper also proposes the implementation of the Decent Homes Standard to the private rented sector. How do you think this will impact this space?

Jeni B: I don’t personally see it as an issue, as I think most properties already fit inside what is regarded as acceptable. The thing that it’s trying to tackle is ensuring that properties are free from any serious health and safety hazards—but what landlord is consciously letting a property out, thinking it might catch fire and kill their tenants at any moment? Landlords aren’t really like that. The general view that we’re hearing from our clients is that this is one piece of legislation they don’t mind. If anything, it’ll drive out the rogue landlords who have substandard properties that are dangerous. It’s helping to professionalise the market, so it’s a good thing, and this is supported among the landlord population.

Juliet B: There’s also a compulsory portal that all landlords will be required to sign up to, which is for compliance, so there’s an additional administrative element to it. I agree with you, Jeni—90% of the landlords are doing the right thing. They’ve got the homes in the right status anyway, so I don’t think it’s a bad thing.

MC: But will it ever reach those landlords, the ones that probably collect cash in hand every week?

Jeni B: They stay below the radar, don’t they?

MC: If it’s in a bad area of a big city, they’re off the radar anyway; they

might not even be mortgaged. Christ, I rented a few when I was a student, and they were horrendous, yet the landlord would be round every week to collect cash in hand. You can pretty much guarantee they are well off anybody’s radar, not paying tax, you name it. They’re the ones that this regulation probably won’t reach—but it needs to.

Jeni B: I think the portal is an interesting one, isn’t it? Because we know it’s going to have details about the landlord. The impression that I got—and I could be wrong—is that it’s going to be a bit like a Trustpilot for landlords. So the question our clients are really concerned about is: where’s the arbitration on this?

Lucy Barrett

LB: The problem with reviews is if anyone can submit them—whether they’re a valid customer or not. It would be a real problem, I think, if people could make unvetted comments.

Jeni B: Back to the ombudsman, if a tenant leaves a very negative review of a landlord on the portal, maybe the landlord would then have the opportunity take it to the ombudsman and there would be some sort of arbitration… I don’t know, but this is what they are quite worried about.

Juliet B: There will be a discussion. But I do think landlords now need to have a proper paper trail in terms of what they’ve done. Gone are the days when you could just say you’ve done everything you could to fix an issue—you must evidence it in writing so you’re not penalised. It puts an additional onus on landlords.

AD: Nick, from your conversations with landlords, do they share the same views and worries about this property portal?

Nick Simmons: No, not at all. I’ve had no clients who have raised concerns with regard to the Decent

Homes Standard. So, mirroring what Jeni said, I think it’s a good thing.

AV: We, as lenders, want it [the portal].

Jeni B: Would you decline an application if someone had a bad profile?

AD: I was going to ask that, actually. I don’t know if the portal will only be available for landlords and local councils to make sure everyone’s accountable. But if it was accessible to everyone , would you use that as part of your due diligence?

Andrew Ferguson

AV: It’s not something that’s come up on the radar yet. But yes, you do landlord Google searches for reputation and, if something comes up, it needs investigating. That’s the beauty of lenders that have a degree of manual underwriting about their process and can then speak to the broker and investigate this. However, some of the larger lenders that have a tick-box or fully automated processes might struggle with something like that.

Juliet B: Additionally, if a matter got to litigation, it would be remiss of you to have information at your fingertips and to not review it.

MC: I think it would pop up on certain AML/KYC searches, LexisNexis, and other systems that look for negative things online. And you do get certain things that pop up about court cases or challenges, or your previous employment—information that isn’t always relevant, but you do want to see if it has a bigger impact. So I imagine it’s just an extension of that.

AD: Emily, what do you think? Would you be keen to have access to this property portal to vet landlord applicants?

EH: I think everybody would want us to say no but, if there’s data available, we’re going to want to have access to it. Having said that, even at the moment with the EPC ratings, we are asking that of the valuers. If it’s something they have access to, we wouldn’t necessarily go down the route of scrutinising every single property on that basis. It’s still ambiguous and up in the air, and I feel it’s less likely to come in.

AD: This brings me to my next question— do you think any of the current proposed regulations will actually be implemented?

Jeni B: I think section 21 abolition will definitely come in this year. I also believe the Decent Homes Standard bill will go through, but the minimum EPC changes will be postponed as they’re reassessing the way that EPCs are done

at the moment, aren’t they? I think this will be pushed, but it will still happen.

AD: In your opinion, what should be implemented in terms of tax and regulation?

AV: Can they just reverse it? [ laughter ]

LB: [ laughter ] I think there’s enough.

AV: Yes, nothing for now. Everyone needs time to settle and understand the landscape as it is today so that we can all do things correctly, reach a norm again, and then review it.

CM: I agree—you need to have time to be able to understand it and the implications, and then pass this knowledge on to the client so they can make decisions.

Juliet Baboolal

The rise of the company owner

The trend of buying BTL properties through limited companies is still proving popular with landlords

wning a BTL property via a limited company is proving increasingly popular as a result of changes to the law.

The main one came in the 2015 Finance Act, which impacted setting costs against tax. The biggest change was that landlords could no longer offset finance costs, such as mortgage payments and interest on loans taken out to furnish properties, against their property income.

Words by Jon Yarker

Since the act came in, interest relief was increasingly reduced over time until it became nonexistent from 2020/21. It was replaced by a 20% tax credit on finance costs. The changes have affected all client conversations, says Propp managing director Paul Elliott: “We did a lot of work at the time educating clients about the impact this was going to have and the potential benefits of incorporating, and that this was a tax issue they needed to discuss with their tax adviser.

“But it wasn’t until tax returns

started to catch out landlords when people really began to consider how they could protect their cashflow.

“These days, we have that conversation with every client we talk to who is looking to buy a BTL property.”

Traditionally, the main benefits of corporate ownership were related to stress testing, but now tax is making more landlords turn to this option, as currently, profits are taxed at a flat rate of 19% corporation tax. From April 2023, the corporation tax will rise to 25% for profits over £250,000, while companies with profits of £50,000 or below will continue to pay 19%. For companies between the two thresholds, a system of marginal relief will apply. There is also no restriction on the amount of interest that can be deducted. In addition, limited companies are not liable to pay capital gains tax.

One tax adviser who has found himself talking to more landlords about the use of companies is Alexander & Co tax partner John McCaffery.

With changes in how landlords’ profits are calculated, higher-rate taxpayers are now having to pay more if they continue to hold properties in their own name, he explains.

To articulate why personal ownership may no longer work for some landlords, John gives the example of a BTL landlord owning their properties in their own name with £70,000 of rental income who would have previously deducted interest to drop down to the basic rate band.

“Now, you’re pushed into the higher rate bracket,” says John. “So you’d pay 40% on £20,000 even though your interest costs would have previously dropped you down a band. Obviously, a lot of these rates are variable. Your interest costs are increasing—therefore, your restriction is more painful.

“Tax is becoming a really problematic cost, especially when margins are tight and in relation to interest restriction. You

The market has matured and lenders now understand they must have a limited company proposition if they want to stay relevant in the market”

Tax is becoming a really problematic cost, especially when margins are tight and in relation to interest restriction”

have to make sure you’re making a living, and also know what your tax costs are.”

The tax benefits of incorporation are driving a surge in the number of landlords choosing this route. Research from Hamptons found a record 300,000 landlord companies existed in September 2022; the total number of BTL companies had doubled since 2017, when interest relief began to constrict significantly.

Now, estimates from Hamptons suggest around 40% of all new BTL purchases are made via a corporate structure, compared to just 10% in 2016 before section 24 of the 2015 Finance Act came into force.

Brokers highlight other benefits of this route, such as more structure for succession purposes, but tax is clearly the main driver of this trend.

Wait for it

Tax advice is therefore proving increasingly important for BTL landlords, both new and existing. The latter are taking an interest as properties can be transferred into a company ownership structure.

There are benefits to waiting to do this, explains Paul: “We have not seen a huge transfer, maybe because there is a lag for most of them; to get section 162 incorporation relief of the Taxation of Chargeable Gains Act 1992, they are going through the LLP route and most accountants suggest they have to hold an LLP for 18-24 months before getting this relief.”

Incorporation relief is an additional benefit of company structure, whereby a landlord can delay any capital gains tax payable on the transfer of properties into the company until they have disposed of their shares.

Less of a stress test

For new landlords, company ownership can also be advantageous when applying for mortgages. Lenders base rental cover stress testing on the marginal tax rate of the applicant—basic rate taxpayers must satisfy 125% rental cover, while this is 145% for those in higher rate tax bands. This can make matters difficult, explains Brightstar’s BTL consultant Neil Taverner: “For the higher rate taxpayers, the stress test, especially in this climate,

[makes it] a lot harder to make it fit with regard to the rental calculation.

“If you’re applying with a limited company, whether you’re a basic or higher rate taxpayer, the stress test is at 125% full stop.”

This means BTL landlords may be able to raise more money through a limited company than in their own name in a marker where interest rates are rising. This flat rate of 125% may prove advantageous for some, but Aria Finance sales and commercial director Joseph Aston warns this does not guarantee approval.

“It’s important to note that a lender will still need to review the credit profiles of directors and shareholders of the limited company, and you may still be required to provide a personal guarantee on the loan,” he notes.

Also, from a tax perspective, company ownership can raise its own challenges— namely extracting funds in an efficient way.

“A company allows you to manage the flow of cash out and when you pay tax, and who pays tax, to a certain extent,” says John. “The potential downside is there is a secondary tax charge on getting the funds out of the company, in terms of dividends etc. Dividends can be tax efficient, though.”

The current rules stipulate that, above an individual’s allowance of £2,000, dividends are taxed at 8.75% for basic rate taxpayers. Higher rate and additional rate taxpayers are taxed on dividends at 33.75% and 39.35% respectively.

Stay relevant

The move towards company ownership is becoming so popular among BTL landlords that many brokers expect this trend to continue.

Paul welcomes the changes he is now seeing: “When this first started to happen in 2015-2016, I had genuine conversations with product pricing guys at lenders who did not understand what they were talking about.

“However, the market has matured and lenders now understand they must have a limited company proposition if they want to stay relevant in the market. There are a couple of the bigger lenders who don’t currently offer this, but we know they are looking at getting into the space.”

A lender will need to review the credit profiles of directors and shareholders of the limited company, and you may still have to provide a personal guarantee”

Words by Lauren Bagley chief partnership and marketing officer at Uinsure

When specialist insurance becomes essential

Eagerness to return to normality after the pandemic has been a common discussion point in a range of businesses—including landlords. But normality—in terms of market conditions before Covid— never returned. A cocktail of numerous lockdowns and global events, such as the Ukraine war, meant the evolving landscape made markets more volatile. As a result, staycations have become more popular while the cost of living has risen, and both have consequences for how landlords and their advisers need to arrange insurance policies.

HMOs to holiday lets

In today’s age, landlords can be roughly split into three groups: property investors, accidental landlords, and those with holiday lets.

Property investors are often considered to be landlords in the traditional sense. While they may have niche requirements for their broad portfolios, the rise in HMOs has meant their need for more specialist insurance has grown.

Accidental landlords—those with an inherited single property they rent out—typically require straightforward cover, from an insurance perspective. However, those who manage holiday lets will almost certainly need specialist policies for their complex requirements.

Since the pandemic, holiday lets have become highly prominent, with the rise in the popularity of staycations leading to a 40% increase in the number of holiday lets between 2019 and 2022. Given the potential profitability of such ventures, the growth in that market segment shows no signs of slowing.

Although the likes of Airbnb and

vrbo.com rentals have become well established, most insurers are unlikely to cover them under standard terms as tenancy agreements will not be in place.

While it is essential that advisers and their clients arrange tailored policies, the more intricate nature of specialist insurance should not be viewed as a negative. Instead, it provides another route through which advisers can offer significant value to their customers.

Accidental underinsurance

Without recognising and adapting to a changing market, it is easy for landlords to become underinsured. A policy that does not meet a client’s needs can end up being a costly problem.

Two timely examples of how this could happen in 2023 involve cover for the cost of rebuild and loss of rent. With some predicting a rise in building materials costs this year, and almost unprecedented inflation figures increasing wages across the board, the cost of rebuilding needs to be fully accounted for to prevent a financial headache, should the unfortunate happen. It would be easy for a policyholder to renew an existing policy without checking rebuilding costs, which may be substantially higher than they were 24–36 months ago. Not only that, but with an estimated 500,000 tenants in the UK behind on their rent, it makes sense to include loss of rent cover in a client’s policy.

So not only do specialist policies help to avoid invalid ones and underinsurance, but they are also more cost-effective than standard insurance as they are tailored to a landlord’s specific risks and needs, rather than offering a one-size-fits-all approach.

Moving with the times

Given the nature of the sector and the fast pace at which tenant requirements, and therefore landlords’ properties, are evolving, it’s only natural that insurance products also move with the times. Advisers need to stay alert and be aware of developments.

Changes have largely taken place in two main ways: first, the products themselves have been adapted to cater for specific clients, such as Airbnb and portfolio landlords. Second, the way in which advisers and their customers can purchase insurance is quickly developing. Technology simplifies online quote journeys and allows them to cater for specialist insurance enquiries.

Previously, advisers may have turned their customers to price comparison websites to try to find a quote that most closely aligned with their needs. Now, the developing nature of landlord requirements mean that it’s worthwhile looking elsewhere to meet specific needs.

Our own insurance technology automatically applies high-cover limits to a wide range of specialist insurance products that can then be customised to fit a client’s needs. This alleviates the risk of underinsurance, as well as massively simplifies traditionally complex quote and application journeys. Through Uinsure’s adviser platform, the same basic principles to generating quotes apply to specialist clients, as well as standard home insurance enquiries and, with simple training, advisers can get both the confidence and know-how to operate effectively in these spaces and be sure their clients have the right policy for their need.

Changes in property rental types and a volatile market mean landlords would benefit from specialist insurance—and this may work out cost-effective

Steering

the

through storm

With the frequent and sometimes sudden BTL product changes of late, how are brokers coping? Five experts share their experience and advise on navigating these choppy waters

Toby Breeden, new business director at Crystal Specialist Finance

It’s certainly a challenge at the moment, but one we keep on top of. Primarily, we manage through the relationships we have with individual lenders. We have a dedicated update process with each of them so that when products change, we know about it in advance. More broadly, we use sourcing systems plus a combination of industry press and product updates.

HOW DO YOU KEEP TRACK OF THE FREQUENT CHANGES IN BTL PRODUCTS FROM LENDERS?

Shazad Ahmed, director at Elan Property Finance

Nowadays, it is no longer enough to rely on email updates from lenders. The first and last thing I do each day is check for any rate, product and criteria change that will affect existing deals in the pipeline, as well as cases that are due to be submitted. Sourcing systems will, of course, provide up-to-date information about interest rates and tools, such as Knowledge Bank, can help with criteria. However, I’ve found that even these are not always up to the minute right now. Industry websites are helpful, including LinkedIn bulletins about these revisions. Communication is key right now. When there are criteria and product changes, we are informing clients about these via our internal newsletter. What doesn’t help are some of the silent criteria changes that come up at point of submission or, worse still, underwriting.

Meir Peer, director at Redi Finance

Being that my background has mainly been focused on bridging, it goes without saying that the recent volatility in the BTL market all came to me as a bit of a culture shock. This recent period where the market was changing on a daily basis was personally one of the most confusing and frustrating times in my specialist lending career. The changes were sometimes hard to keep up with. Other than mail shots—whether direct from lenders or news publications that cover the industry—I tried to keep myself up to date by constantly speaking to other brokers I am close to. For me, this is still a great way to stay informed with different products and to find out what is working well for others in my shoes.

Matthew Rowne, director at The Buy to Let Broker

Our specialist advisory team have access to all up-to-date sourcing software, in addition to various mortgage criteria search systems—should they need them. We very much expect all of our advisers to have a complete knowledge of all lenders in respect of criteria, policy and even subtleties, such as individual sensitivities and appetite within different areas of lending. We also work intimately with nearly all specialist finance providers and, as such, lenders’ senior management, underwriters and regional representatives will often work from within our offices offering on-the-spot sign-off in many cases— sometimes offering clients additional layers of certainty.

Kim McGinley, director at VIBE Specialist Finance

It’s certainly been difficult in recent months with so many daily/weekly lender product changes. It all comes down to the correct communication from the finance providers as, without this, it can get extremely complicated. We now have a process for keeping the team updated and have regular meetings to discuss them. Sourcing systems— in instances where they can be used—certainly help. However, even these could not keep up to date with the rapid changes in the market towards the end of 2022, so it was back to the good old days of manual sourcing for a while. As many lenders’ turnaround times were severely impacted for a while, it hasn’t just been about sourcing the most competitive finance option product-wise, but about who can actually get the case across the line in a timely manner. It’s imperative that us brokers can see clearly on lenders’ websites what their current turnaround times are to ensure we are providing the most suitable finance product to a client.

Meir Peer, director at Redi Finance

When a change in the market has impacted completion of a live case, the panic in some of the clients’ voices was a really upsetting thing to witness. I have had instances when I was lucky enough to have time to place the deal elsewhere but, for some cases, when time was short, we would look at a bridging loan as an option. In the worst case scenario, the deal just no longer fitted and the clients had to walk away. At that point, plan B is off the table. It is a tricky situation because some of the clientele like to focus the blame solely on the broker, but more experienced investors understood the pressure someone like myself was under and never pointed the blame in my direction.

Matthew Rowne, director at The Buy to Let Broker

There is universal acceptance that the lack of certainty, consistent variation in lender policy/criteria and, to some degree, underwriting guidelines can make an adviser’s role more challenging, more complex and, as a direct result, considerably more time-intensive. However, great challenges usually present in tandem with even greater opportunities—in this case for landlords and for specialist brokerages and lenders within the sector. The tough environment has resulted in more solutions for landlords and greater options, which indirectly should have a positive wider impact on the PRS and, most importantly, tenants. Such complexity has further polarised the market, and it is of greater importance that the professional landlord and their wider advisory team—including a specialist brokerage and tax adviser—work in partnership for holistic solutions.

Kim McGinley, director at VIBE Specialist Finance

Initially, deals were negatively impacted, with some lenders giving unrealistic deadlines before increasing rates which, at times, felt like an unfair partnership. Our team has a process when new rates are announced to make sure clients are being moved over to them where appropriate. With any case, our job as a specialist broker is to ensure we can secure another rate as quickly as possible for customers. The issue here is that the mortgage process is so much longer now compared to 18-24 months ago, and starting the process again is not always easy. All we can do is keep our clients updated as much as possible and keep expanding our knowledge of the market and staying on top of changes so, if a deal falls through, we can act on it quickly.

Toby Breeden, new business director at Crystal Specialist Finance

Obviously, deals were impacted when products were withdrawn with little or no notice following the minibudget in September last year. This involved a great deal of reprocessing applications, but we adapted over time as product changes became more regular and we were able to anticipate them. Importantly, we also managed the expectations of all parties, constantly updating them and making them aware of key dates, which helped to reduce the number of impacted deals.

HAVE THE CONTINUOUS CHANGES IN BTL PRODUCTS AFFECTED YOUR BUSINESS?

Shazad Ahmed, director at Elan Property Finance

We have not had too many deals where the changes have made them unworkable—one of the reasons why is that we are stressing the urgency of getting the correct information upfront to the clients and how speed of decision is important in the current market. Where there have been issues, customers have had to make the choice of perhaps waiting it out (if there is no urgency) or continuing to proceed if there is a need for speed (for instance, when coming off of a bridging loan). Plan B is essentially re-sourcing the deal and moving it to another lender; this is inconvenient and doesn’t provide a good customer journey, but we’re here to manage expectations and keep things moving. Some clients understand, while others don’t; at the end of the day, firefighting is part of the job. I think the key skill right now for brokers is to avoid having to resort to a plan B—you have to work with deftness and skill.

Toby Breeden, new business director at Crystal Specialist Finance

No, as we were all in the same boat and reacting as an industry to circumstances beyond our control. Obviously, the situation was difficult at the beginning, as lenders couldn’t give us much— if any—notice when withdrawing products or amending criteria, but they quickly adapted by improving their communication with us which, in turn, meant we could keep either the broker or the client fully up to speed with developments.

IS THIS AFFECTING YOUR RELATIONSHIPS WITH SOME LENDERS?

Shazad Ahmed, director at Elan Property Finance

Relationships with lenders are becoming strained, mainly because of the lack of notice for changes made without any context. The reasons for these last-minute revisions have been so wide ranging—from cost of funds to staffing and service levels—and this really shows which lenders have the capacity and ability to function in a period of instability. At the end of the day, we are dealing with people buying houses as an investment, so some logic and common sense need to be applied with a focus on people over profits. BDMs, on the whole, are compassionate and empathetic about the broker experience; however, even they are bound by their employers’ policies. At this point, it is clear which lenders are less prone to changes, and which provide a more reasonable notice time before any amendments. How brokers and, ultimately, customers have been treated during this period is something that I personally will keep at the back of my mind in future. It is also something that can be mentioned at point of recommendation as something a client should consider, aside from rate and cost.

Meir Peer, director at Redi Finance

I don’t think the sudden changes have impacted my relationship with anyone. The same way I wouldn’t want the client to blame me for a last-minute change to their loan, I don’t hold any individual at a lender responsible either. I think you find that a lot of BDMs will ring or email you as soon as they know when a change in rate or criteria is going into effect, and that really helps when setting expectations for your customers. Luckily, there will be someone else, more often than not, with whom you can place a deal when it no longer fits elsewhere— however, the most important aspect is time. With loan progression moving so slowly these days, you can only hope that if there was a scenario that brought on changes, you at least have time to make things happen for your client. I think most brokers will always have their favourite handful of finance providers for different deal types. Whether it is residential, commercial or anything else, if the product on offer is the right one for the client, I love approaching the lenders that have always provided good service and have proven to be trustworthy from their track record.

Matthew Rowne, director at The Buy to Let Broker

We are incredibly privileged to benefit from strong commercial relationships with nearly all specialist lenders, which have been established over many years through a foundation of collaboration, a commercial respect for the quality of the business that we introduce to lenders, and the comprehensive nature of the way we package cases. There will, of course, be times when eleventh-hour changes to lender policy or products will negatively impact a client solution. However, while representing a customer, a brokerage also needs to remain empathetic to a lender’s issues and educate clients as to why changes have been introduced. Client knowledge and education enable one to manage borrower expectations, and a professional brokerage will help ensure that finance providers do not suffer reputational damage— especially during such challenging and volatile times.

Kim McGinley, director at VIBE Specialist Finance

Some lenders definitely stood out by a mile when it came to their last-minute product changes. Also, those that gave brokers realistic deadlines to get cases over were appreciated so much more, particularly as brokers have been under serious pressure, with many suffering burnout towards the end of last year after working so hard to secure rates and products for their clients. On the other hand, you had lenders who made changes with no warning at all. Some BDMs have been great throughout this whole time, staying in regular contact to keep relationships going, even when the company they have been working for has been struggling with timescales or workloads, and those relationships have really strengthened. I would say it has affected our lender partnerships with those who gave no notice or withdrew products on cases, even those with a valuation, much further down the line. On the back of that, we are having honest conversations with customers about choosing to go with another lender.