Thoughts on Landlord Affordability, Section 24 and todays Interest Rate levels

Section 24 has hit landlords hard (sorry, I know, shock news…). Ever since George Osborne announced the altered treatment of mortgage interest as tax deductible in 2015, implemented it in the Finance Act in 2016 and then the gradual phasing-in of the changes over four years until they were fully in place for our tax returns in 2021, it has been obvious that when the time came for the hiking of the Base Rate (an inevitability sooner or later) this would devastate landlord incomes from their portfolios, whether one property or dozens.

By devastating incomes, I really mean devastating the pension plans of millions of owners across the country. According to the most authoritative large-scale survey on the subject, 82% of landlords own either one (43% of the landlord community) or between two and four properties (a further 39% of landlords). (source; English Private Landlord Survey, 2021). As is often remarked upon, that level of ownership doesn’t make landlords fabulously wealthy oligarchs, it makes them prudent pension and investment planners, that’s all.

Some landlords looking to exit because of Section 24 – and no surprise there

So the surge in the Bank of England’s base rate would lead to a limited number of outcomes: landlords exiting the Private Rented Sector (PRS) because of the lack of income – maybe even losses – from their rentals; extreme increases in tenant rents as landlords understandably tried to cover their increased costs; and the PRS moving towards corporate suppliers (if there were any likelihood of the Build-to-Rent sector being able to take up the load – there isn’t, by the way).

There’s an interesting confirmation of this latter outcome in last week’s release of the report by the Levelling Up, Housing and Communities Committee (6th February, 2023): “In particular, it is difficult not to suspect, given the changes to how the buy-to-let sector is taxed, that the Government would like landlords with smaller portfolios to leave the sector”.

A quite extraordinary plan if their suspicion is true: as these smaller landlords account for 52% of all actual tenancies, you’d have to wonder where tenants would actually live in this weird alternative reality.

So here we are with potentially a quarter-to-a-third of landlords considering or acting upon exit. There’s research-based comment and evidence on the scale of retreat from the sector courtesy of the NRLA:  “…more and more landlords are planning to sell off at least some of their properties – just over a quarter according to the NRLA’s latest survey”

What’s the reality to claims of landlord losses?

To put the numbers faced by landlords in context, I have a little ready-reckoner that allows a buy-to-let landlord to see the numbers for themselves. It’s very simple: just input six basic numbers, and it works out the full impact of Section 24, interest rate rises, and income tax. It compares the situation in the halcyon days pre-Section 24, versus the difference to when Section 24 came in but the base rate was (to be honest) unrealistically benign at 0.1%, and then versus the savage impact now after 10 consecutive rises. Of course, most landlords will be aware of the issue, but given the scale of surprise that the base rate hikes have had, perhaps not enough politicians (and probably Shelter, too?) realised enough for them to fully understand the ramifications.

Access the Interest and Tax ready-reckoner here.

Taking a pretty ordinary scenario, a property at the average UK value of £275,000, with a loan to value ratio of 70% on an interest-only mortgage, might deliver rent for that scale of home of £1500. That’s actually a pretty toppy figure in this region, but let’s be optimistic for the sake of this rather highly-leveraged, although far from extreme, landlord situation. In the pre-Section 24 scenario it created £7913 of nett post-tax revenue to a typical b-t-l landlord. But now, with the base rate about to hit 4.5% at the next Monetary Policy Committee window, that same property will make £20 for the same landlord after tax (you read that right, twenty of your English pounds). Small wonder landlords are exiting…

Please note, this is only for unincorporated landlords (the vast majority of small landlords, in other words). If you’ve put your portfolio into a limited company structure you have the ongoing right to deduct finance costs from the company’s revenue. The Interest and Tax Ready Reckoner works for both Fixed Rate and Tracker mortgages, and gives you an instant answer to the nett, post-tax situation at whatever new mortgage rate you are considering.

Tenants too bear the brunt of Government policy

And obviously the outcomes for tenants aren’t any more palatable. Can tenants physically pay more, when energy bills alone have more than doubled? The predicted new average expenditure on utilities at £2360 (Cornwall Insight) is still double last year’s average. And of course utilities are only part of a savage rise in the cost of living.

Personally I am very uncomfortable indeed with any notion that my own lovely tenants, long-term clients one and all (some of them now exceeding seventeen-plus years of renting with me), should lose their homes because the only option might be to sell. For the present I’m absorbing the vast majority of the hit, and I know many landlords are doing the same.

Make your voice heard

Of course, there are moves to try to alter the course of the PRS by reversing Section 24. There’s a petition doing the rounds to reinstate tax relief on mortgage interest:

As at today’s date there’s 33,425 signatures on that. Aside from the fact that the petition needs 100,000 signatures to be debated in Parliament, this number of participants appears pitifully small against the 74% of landlords who have used mortgage funding, and there’s 2.3m landlords in England.

 Table 1.17: Funding of first rental property, by portfolio sizeone property onlytwo to four propertiesfive or more propertiestotal
buy-to-let mortgage (repayment)14.315.014.214.6
buy-to-let mortgage (interest only)20.329.137.026.4
conventional mortgage (repayment)36.920.515.927.1
conventional mortgage (interest only)
(source: English National Landlords Survey, 2021).

I guess those of us that supported the attempt promoted by Property Tribes to get a Judicial Review in 2016, on which Cherie Blair tried hard with a compelling case but sadly failed, may feel the time to act was then rather than now. The same Government stance still seems to apply anyway – a basic belief that what they introduced was “fair”, irrespective of the inevitable eventual ruinous effects on tenants and the savaging of the pension plans of millions of landlords, if only they had looked far enough ahead at obvious scenarios.

I don’t know if this is a lesson in unintended consequences, or just vote-pandering by a Conservative Government that assumed tenants would welcome voting Tory because of this policy (…not sure how that’s going now, lads…).

Even so, I encourage landlords to make their voices heard via this petition: there’s quite a groundswell of opinion building.

Might things change?

Back to the Levelling Up Committee Report: there’s some very powerful conclusions in there that may just help sway Parliamentary debate towards at least some good sense. Most notably, directions like “…we recommend that the Government review the impact of recent tax changes in the buy-to-let market with a view to making changes that make it more financially attractive to smaller landlords”. The NRLA are right behind this and pressing the message home powerfully about the implications of Section 24 for national housing policy.

So, despite the pressure on landlords (and thereby on tenants), maybe it’s right to be more upbeat: there’s myriad good reasons to stay invested in property, and rising rents will mean that many landlords, especially those with low loan-to-value ratios or without mortgages, are looking at healthy returns. There’s also the effect of Capital Gains Tax to consider on sales of rental stock, at a not-inconsiderable 28%.

There’s also market expectations that base rate might revert back to a lower level, maybe 3%, towards the end of 2023. All speculation, but that would represent a dramatically more promising situation for landlords. Worth riding out the storm?

Even so, for a significant minority of landlords, exit may be the right option to consider.

If a sale is right for you, where do you go from here?

If that’s you, then talk to an agent that has twenty-plus years of experience in how to sell properties for landlords. It is not always necessary to get vacant possession before putting a property on the market: for starters, some rental properties sell well to other investors; obviously we know landlord/investors. Others suit first-time and other buyers who we encourage to work with the tenants in occupation over the extended time a sale can actually take. We aim to keep homes occupied for as long as possible, even up to the day of completion on a sale. Northwood Leicester has a good track-record in achieving this great result for landlords on properties that we manage – it can’t be guaranteed but you’d be surprised how often we achieve it.

Speak to Gosia – we would welcome landlords talking to us about switching management to Northwood, and about selling your rental property, as part of our package.

Gosia Prazeniak - director of Northwood Leicester

If you need to talk to the agent that understands what it means to be a landlord (we are landlords, after all), click this link – we’re looking forward to talking to you.

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