Five things buy-to-let landlords need to know going into 2018

New regulations, tax changes and tighter lending rules are changing the buy-to-let market. In these uncertain times, it’s more important than ever that landlords are clued up about their obligations and savvy about minimising overheads.

Portico, the London-wide residential estate agents with an office in Camden have revealed five things that landlords or potential investors need to know as we head into 2018.

1. Mortgage Interest Tax Relief Changes

Before April this year, landlords could deduct their full mortgage interest costs from their income when calculating their tax bill. Now, landlords are only able to offset 75 per cent of their mortgage interest.

In the 2018 to 2019 tax year, this figure will drop to 50 per cent and in 2019 to 2020 the figure drops again to 25 per cent, until in 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction.

What should landlords do?

While these changes are inevitable, landlords can mitigate the hit by cutting their interest costs by re-mortgaging. Buy-to-let mortgage interest rates have fallen significantly in recent years, so deals currently on the market may well be substantially better than on products arranged a few years ago.

With large increases in property prices in London over the last few years, another good idea is to get your rental property re-valued. This will make your lender recalculate your loan-to-value (LTV), and a lower LTV means a better interest rate and a larger choice of lenders.

2. Utilising Airbnb To Avoid Void Periods

Cuts to mortgage interest tax relief are certainly going to cut into landlords’ profits - but add long void periods into the mix and landlords could wipe out returns altogether. Thankfully there are smart ways to avoid voids and actually increase profits - and seasoned landlords are beginning to cotton on.

Currently there are 62,141 active rentals on Airbnb and a staggering 64 per cent of those are owned by multi-listing Hosts, or landlords. Airbnb is an increasing popular short-term solution for landlords (there’s an annual limit of 90 days for London Hosts), who are utilising the site to synchronise their tenancy to begin in a busy season where they can command a higher rent and fend off void periods by putting their property on Airbnb, until they find a long-term tenant.

3. New PRA Rules For Portfolio Landlords

New buy-to-let mortgage rules have been hitting portfolio landlords since the end of September 2017. A ‘portfolio landlord’ is defined as a borrower who owns four or more distinctly buy-to-let mortgaged properties.

What are the new rules?

Under the new rules, if you want to make an application for a buy-to-let-mortgage on a new rental property, the lender will have to look at your entire property portfolio before deciding what mortgage deal they can offer. For example, if you have four properties generating enough rent to cover mortgage payments, but one property that isn’t, your new mortgage application may not be approved by some lenders.

What should landlords do?

If you’re planning on investing in a buy-to-let property, make sure you get your mortgage paperwork in order and keep your property portfolio spreadsheet up-to-date. If you are considering investing further but one of your current rental properties is underperforming, you may want to consider selling up.

4. New Minimum Energy Efficiency Standards

Landlords have just over six months to ensure their rental properties meet the new Minimum Energy Efficiency Standards. As of April 2018, all buildings within the scope of MEES must have a minimum Energy Performance Certificate rating of E, or they will be illegal to rent out. A civil penalty of up to £4,000 will be imposed for breaches, so it’s imperative you make sure your rental property meets energy efficiency standards.

What should landlords do?

Get an up-to-date EPC assessment on your rental property.

5. London House Prices & Rental Yields

According to the latest House Price Index from Rightmove, the capital saw a 3.2 per cent annual price drop, taking asking prices to an average of £611,000. Though this may be disheartening to investors, the price drop was primarily driven by the softening market in London’s most expensive, central boroughs, while property prices in the city’s most ‘affordable’ boroughs continued to rise.

Barking and Dagenham, London’s most affordable borough, saw the average asking price rise by 5.2 per cent, taking the average property price to £312,443. It is in these ‘affordable’ boroughs that rental yields are highest; landlords can find a high 6 per cent yield in Barking, a 6.1 per cent yield in Ilford and a 6.2 per cent yield in Chadwell Health, (both in the Redbridge borough, where property prices grew 4.7 per cent annually).

Vidhur Mehra, Finance Director at north London estate agents Benham & Reeves Residential Lettings also believes landlords need to be aware of the new changes moving in the new year. Vidhur recommends that if any landlord is in doubt about what to do, they should contact an ARLA registered letting agent for further advice about compliance.

“In April 2018, the government plans to introduce a new Minimum Energy Efficient Standard (MEES) of rating E. This means any property in England and Wales must achieve a minimum E rating before it can be rented or sold. This is particularly important for landlords in North and North West London where there is a lot of older housing stock as for some, it could mean costly major works to make the necessary improvements,” Vidhur said.

“If it is only new tenancies and renewals that require an up-to-date EPC and a minimum rating of E, then landlords with long-term tenancies already in place need not be too concerned (it won’t be extended to cover all private tenancies until April 2020). This is true for regulated or assured tenancies too if they were set up before October 2008. After that date however, any new lettings or sales will have to conform to the EPC changes,” Vidhur adds.