Spotlight: A changing world

A changing world

Amid thinning margins, rising rates, and EPC changes, Jake Carter talks to Aldermore’s Jon Cooper about navigating BTL waters

The buy-to-let (BTL) market has seen rapid change over the last few years, with regulations altering, the pandemic, and the current state of the economy among the influencing factors.

With buy-to-let rates rising thanks to the Bank of England upping the base rate, Jon Cooper, head of mortgage distribution at Aldermore, is expecting to see this trend continue.

The Bank of England increased the base again rate in June, raising it to 1.25 per cent, and it is expected to increase further over the remainder of the year. Six members voted in favour of a 0.25 percentage-point rise, while three voted for a 0.5 percentage-point hike.

Cooper explained that as margins continue to be squeezed for landlords, he believes more consideration will be given to limited company ownership structures for new acquisitions, but he said that receiving the right tax advice will be key.

“Landlords will have to pass on cost increases from rate rises to tenants at some point, although many will likely hold out for as long as possible,” Cooper said.

He said this will add to the financial strain tenants are experiencing due to the inflationinduced increase in the cost of living affecting prices for food, fuel, and utilities. According to the Office for National Statistics, 87 per cent of adults in the UK reported an increase in their cost of living in April 2022, with energy bills rising substantially, and many are struggling to keep up with their payments.

ENERGY FOCUS

A small silver lining of climbing energy bills is that there has been a flood of landlords and residential homeowners looking to improve the energy rating of their properties in order to reduce costs. The move is well-timed, given that the government is currently – although this has not yet been confirmed – planning to introduce the new Minimum Energy Performance of Buildings Bill, which will require a minimum EPC rating of C for new tenancies from 2025, and for all rental properties by 2028.

As rental properties in the future will be required to have an EPC rating of C, Cooper explained that while there has not yet been a rush from landlords

“[Tenants are experiencing] financial strain due to the inflationinduced increase in the cost of living affecting prices for food, fuel, and utilities. According to the Office for National Statistics, 87% of adults in the UK reported an increase in their cost of living in April 2022, with energy bills rising substantially, and many are struggling to keep up”

to begin improving their properties, the awareness of the need is there.

“This is especially noticeable among largerportfolio landlords, but there is hesitance to invest in upgrading existing stock until full details of the requirements are published,” he added.

According to Cooper, landlords are targeting

Jon Cooper

properties that are already C grade for new acquisitions – which could place added focus on new builds. However, he stated that so far there has not been a rush to sell properties with low ratings.

However, he explained that because landlords are targeting those higher-rated properties for new rental homes, he believes this will potentially limit the availability of energy-efficient housing stock for first-time buyers.

“It is catch-22 at the moment as CGT bills and other costs incurred from disposing of the property will have to be taken into account, which may end up being more than the cost of the upgrade work in the first place,” he said.

“A small silver lining of climbing energy bills is that there has been a flood of landlords and residential homeowners looking to improve the energy rating of their properties in order to reduce costs. The move is well-timed, given that the government is currently ... planning to introduce the new Minimum Energy Performance of Buildings Bill”

PLAYING UNDER NEW RULES

While interest rates have continued to creep up, Cooper said that he has not seen a rush from landlords to remortgage or sell. “I have [however] seen an increase in clients moving to owning property in limited company ownership structures [instead of] personal names,” he said.

As the rules and regulations behind the buyto-let market become tighter and tighter, Cooper pointed to BDRC data that has shown a continued rise in the number of landlords intending to sell their properties and exit the marketplace.

Finally, turning to the future of the buy-to-let market, Cooper said that he is expecting limited-company ownership structures to become more common.

He explained that, unlike in 2008, lenders have funds available to lend providing affordability criteria is met, and, according to Moneyfacts, the number of buy-to-let mortgages available in the market has increased by over 1,000 to 3,374 over the last 12 months.

In addition, he is expecting demand for tenancies to continue to remain high, given the current UK average house price of £290,000, which is approximately seven times more than the average salary earned by the average 30-to-39-year-old.

“The high cost of living is reducing the amount that can be saved from disposable income to go toward deposits, which is something I anticipate continuing in the future,” Cooper concluded.