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Commercial Finance

Our top tips for navigating the changing buy-to-let landscape

Buy-to-let investments are still proving a popular choice, despite changes ushered in by the Government over the past two years in its attempt to ‘level the playing field’ for first-time buyers.

There had been concerns that increased stamp duty and cuts to mortgage tax relief for landlords would have deterred investors. However, the market has proved resilient and many property investors have simply adapted their business models to weather the changes, in a number of different ways.

Some have moved away from residential to commercial or semi-commercial property, or shifted their geographical focus, to look at up-and-coming areas instead of the more traditional rental hotspots, whilst others have set up limited companies to purchase their properties. As this suggest, many investors see property as a long-term investment, and therefore are prepared to adapt and evolve their portfolios as necessary to take the changes into account.

We’ve put together a few tips for investors, whether you’re new to the market or a professional landlord, to help navigate this fast-changing landscape:

Do your homework

It’s a time of change for the sector, so monitor the industry news to keep up with new developments or hot topics. Last year saw the stamp duty increase, while in the past few months, there have been cuts to mortgage tax relief, new PRA guidelines in relation to underwriting criteria and interest coverage ratios, and the ban on lettings fees for landlords.

Property investors need to be able to adapt to new regulation and ensure they’re getting financial advice in terms of their own position and the impact the changes may have on profitability.

Work out rental yields

The rental yield is the annual rental income as a percentage of the property value, so you will need to work out accurately whether the property will be profitable.

The Prudential Regulation Authority (PRA), part of the Bank of England, has set out new guidelines on interest coverage ratios (ICRs) that investors need to take into account in their calculations. The aim of the new rules is to ensure buy-to-let investors could cope with a rise in interest rates and that tenants are protected.

Location is key

Major infrastructure projects, as well as local developments, can greatly affect the money you can make on your investment. The HS2 project, for example, which will eventually create a high-speed train network from London to Scotland, has led to a rise in demand for properties in HS2 commuter towns, presenting many attractive opportunities. Recent research also suggests that faster broadband speeds can add up to 20 per cent onto the value of a house, compared to underserved areas.

Currently one of the best regions for rental yields is the North West. Manchester is popular due to the size of its rental market, with 26.85% of the housing stock in the city being privately rented, whilst there also are several up-and-coming hotspots in Merseyside and Lancashire.

Remember to bear in mind that you will need to live nearby to deal with maintenance problems, or pay a letting agent a management fee to field calls from tenants.

Choose the right property

Research the local market and get to know which areas are popular for different types of renters, such as families or students. In town centres it may be easier to rent out a one-bedroom flat, whereas a three-bedroom terrace is likely to work better in a family neighbourhood. You will have to carefully choose an area popular with renters to ensure the property doesn’t stand empty.

Transport links, schools and leisure facilities can all be important factors, so if you’re looking at an area you’re not familiar with, speak to locals and use sites like Rightmove and Zoopla to get some background information, and a sense of market rents.

For the student market, HMOs, or houses of multiple occupancy can be popular, but these require a licence from the local council, so it’s important to check first with the local authority, as rules can vary widely, and some areas have put restrictions in place to limit these.

Securing finance

Unless you’re a cash buyer, you’ll need a buy-to-let mortgage. With the new PRA guidelines, this process could take longer than in the past, and affordability and stress testing will be more stringent. Lenders will typically look at how much rent the property will bring in, as well as your age, property type, income and credit history and some mainstream banks can have a strict criteria.

There are also a number of specialist lenders, like ourselves. We’ll consider buy-to-let mortgages on properties such as those in need of renovation that the mainstream banks may not, and will also deal with a broader range of applications; from those with complex income streams and the retired, to buyers with a less-than-perfect credit rating, to give just a few examples.

At Together we’ve made a host of changes to our buy-to-let product range over the past year, to ensure our offering addresses market needs. We lowered our rates, increased our loan sizes and also removed the maximum age limit, so that those looking to invest in property as part of their retirement plans aren’t restricted.

We’ve also set out new buy-to-let rates for expats, and those without permanent rights to reside in the UK, so they can invest in British property, as many have viewed Brexit as an opportunity and are keen to retain a foothold in the property market.

Most recently, we’ve introduced a new product range to help investors with multiple properties, so that we can support them through this challenging but exciting time for the sector.