Buy-to-let review

Will student lets get caught in new-regulation crossfire?

Moray Hulme

director for mortgage sales, Paragon Bank

Although proposed private rented sector (PRS) regulation changes should offer both tenants and landlords protection from a broader range of issues, a potential policy oversight could upset an established arrangement between students and landlords, making private renting more difficult for both parties.

It’s back-to-school season, and for the landlords serving the student lettings market this time of year marks a culmination of hard work following summer’s frenetic changeover of tenants. With timescales largely dictated by the academic year, landlords have a small window in which to carry out any necessary cleaning and tidying of the property as well as undertake any maintenance that is required after the outgoing student tenants leave. Each year sees an influx of new undergraduates move into halls of residence, often taking rooms previously occupied by the now more seasoned second-year students who swap university-managed accommodation for the freedom of privately rented shared houses. Although somewhat of a niche, the student-letting model is amongst the most established in the private rented sector, so this cycle is something that has worked for a long time.

However, if proposals detailed in the government’s A fairer private rented sector white paper are implemented, the arrangement will become almost impossible, making it harder for both student renters and landlords.

The changing of assured shorthold tenancies to periodic tenancies will lead to students having monthly rolling contracts that they can end at any time if they give two months’ notice to their landlord.

This new type of tenancy may result in landlords having no idea what date existing student renters will terminate their contracts and move out until two months before they do so – and this could be as late as the end of April.

In such scenarios, landlords won’t be able to market their properties for the next academic year, leaving them open to the risk of costly voids. And if landlords don’t know when their tenants will vacate the property, they cannot sign new tenancy agreements with incoming tenants, making the task of finding a shared house harder for students at a time when they should be focusing on important end-of-year exams.

Previously, tenancies could be ended amicably using Section 8, but despite the proposed changes resulting in almost twice the number of mandatory grounds for possession available to landlords currently, the one covering the student market will only cover student accommodation that is currently let to non-students and apply to educational establishments or purpose-built student accommodation providers.

Despite this clear policy blind spot, the government feels that students need to be included in the scope of the reforms, as they may want to remain in their accommodation “because they have local ties or a family to support.”

While this may be true, and people in such scenarios obviously shouldn’t face eviction, reforms must account for market nuances to ensure they work for all concerned parties.

The majority of the UK’s 2.6 million higher education students will choose to live away from home during their study, their most popular option being privately rented homes, so failing to deliver policy that works for the people who provide these could have quite serious negative consequences for a large proportion of the people it is designed to protect.

According to research undertaken for Paragon’s Studying student buy-to-let report, this market is served by a relatively small proportion of landlords – just over one in ten. If this small group of landlords is deterred from investing in student buy-to-let properties, we may see the sort of stock shortages that have placed upward pressure on rents in other parts of the rental sector.

I feel that some of the response to the publishing of the white paper on reforming the PRS was a little unhelpful because there was a lot in there that responsible lenders and landlords will support, and we must not forget that at this stage the proposals are some way off from becoming law.

This highlights the importance of ongoing discussion on the proposed changes between the government and concerned parties, including landlords and universities, as well as lenders. M I

The majority of the UK’s 2.6 million higher education students will choose to live away from home during their study

Students return – to a tight rental market

Cat Armstrong

mortgage club director, Dynamo for Intermediaries

The student population has had it tough in recent years, especially its members who were looking forward to university life – living away from home for the first time and the freedom that comes with that. The initial stages of the pandemic temporarily curtailed some of these dreams as halls and classrooms were closed, with student life moving online. This also proved to be a tough time for those landlords who have built portfolios to incorporate a large element of student lets and houses in multiple occupation (HMOs) in and around major university towns across the UK.

Thankfully, schools and universities are now largely back to normal, and in the midst of a summer break I’m sure there are many students who are frantically looking to secure accommodation for the new school year, whilst also working out how they can afford to pay for it. On the flip side, I also imagine that many landlords are in the throes of touching up properties and embarking on a series of odd jobs to cover up the previous year’s student misdemeanours and to prepare themselves for a new intake.

When it comes to cost, it was interesting to see a host of research emerge in recent weeks that serves to highlight some of the financial concerns within the student community, especially with the cost-of-living crisis raging.

Analysis from property company Cushman & Wakefield suggested that for every available bed in halls of residence in London, there are 2.5 students. This also outlined that university students who live in halls and take out the maximum student loan available spend threequarters of that money just on rent. In addition, according to the NUS, those living in the most expensive cities are paying over £200 in rent every week, and around a third of students survive on just £50 a month – with one in ten resorting to using food banks.

Supply remains a real issue for students, and rents are increasing sharply because the building of new housing has not kept up with the rising numbers of students attending university. This was evident in the latest market analysis from Goodlord, which highlighted that the lettings market continued to gather momentum as a surge of high-value student lets saw average rental costs and void periods break records in July.

Thanks to higher-than-average demand for student lets, average rental prices in England are reported to have risen by a whopping 17.96 per cent during July. This took the average cost up from £1,050 in June to £1,238 and represents the highest average ever recorded by the Consumer Prices Index, with every region monitored experiencing an increase in the rental costs.

As well as the highest-ever rental price averages, July also saw the index’s lowest-ever void rates. Again, this was driven by a surge in demand for student lets, with the North West and the South West seeing the biggest proportional fall in voids. The lowest voids in England can now be found in the South West, at just five days.

A further study by Accommodationforstudents.com predicted that student rents will rise further due to the supply of HMO student accommodation being compromised under planned changes to tenancies as part of the Renters’ Reform Bill, resulting in less choice and higher rents for students.

Accommodation for students may have already felt the impact following a similar change in the law in Scotland, with students struggling to find suitable accommodation. Edinburgh ranks in the top ten most expensive cities for both HMO and purpose-built student accommodation (PBSA), at £156.34 and £193.47 per week, respectively.

Following post-pandemic grade inflation, which resulted in a higher intake of students at some of the most sought-after universities, some cities are already said to be experiencing an undersupply of affordable accommodation. For example, in Bristol, the average price difference between HMO and PBSA is £76 per week; in York, this is £43.53, and in Edinburgh, the difference is £37 per week. These figures really do signify how tough it can be for students financially, although it’s prudent to say that this is primarily down to market conditions rather than any narrative of landlords dramatically hiking rents in order to take advantage of increased demand. Having said that, after some barren times, this does represent some positive news for those landlords providing good-quality accommodation for students in the right areas.

The continued rise of the student population could see more landlords taking a closer look at how to integrate student lets and HMOs into their portfolios and the strength of the yields on offer. This is an area on which intermediaries with landlord clients should be keeping a close eye. M I

Fixed mortgages attractive in volatile economy

Jane Simpson

MD, TBMC

Following the steepest increase in 27 years, the base interest rate sits at 1.75 per cent, its highest level since 2008. The latest in a series of hikes looks like it won’t be the last, as the Bank of England contends with slow economic growth and inflation that has surged to surpass nine per cent; this is well over the government’s two per cent target, and on course to hit double figures before the end of the year.

Since the Monetary Policy Committee started increasing rates, we have seen a record high average standard variable rate (SVR), leading the Financial Conduct Authority (FCA) to intervene, recommending that borrowers switch to a fixed rate product sooner rather than later in order to save money amidst increasing pressure on household finances.

With swap rates also having increased, pushing up the cost of funding for lenders, we have also seen hundreds of products repriced or withdrawn. In addition to resulting in less choice and potentially higher repayments, the speed with which product ranges are being altered is causing headaches for borrowers and brokers – Moneyfacts’ analysis shows that the average shelf life for mortgage products of 17 days is the lowest they have ever recorded, following a drop from the previous low of 21 days reported in June.

This unusually changeable market and expected additional rate rises are leading to an increased interest in the stability offered by mortgages with rates that are fixed over longer terms.

While historically the appetite for these longer-term fixes has been low, they may appeal to clients with well-performing portfolios who have no intention of selling. With the cost of other lettings business overheads also increasing, many landlords have been forced to increase rents, or will do so in the coming months. Doing so with fixed mortgage costs would help to offset rising prices for things like utility bills and maintenance, or landlords could limit rent increases to help retain good tenants at a time when they are also likely to be feeling the squeeze. While fixing for longer periods can offer stability – something that many may be drawn to amidst so much economic turmoil – there are some drawbacks to be aware of. With less demand for longer fixedterm mortgages, fewer lenders offer them, so there isn’t the same level of competition as we see for shorter fixes. In addition, fixing rates over longer periods can present extra risk for lenders, something that they have to pay to mitigate through generally higher swap rates. These factors often result in longer-term fixed-rate products costing more than shorter-term ones. The reduced flexibility that often accompanies longer-term products should also be considered, and it is important to discuss future plans with borrowers who are thinking of committing to a mortgage for a number of years.

This is because a lot can change over two or five years, let alone seven or 10, so the borrower may want to sell up or at least port the mortgage over to another property in that time, and doing so can incur significant early repayment charges.

We also must think about additional borrowing a landlord may want to access in future. Using the proposed changes to EPC regulations as a topical example, we could see a landlord who has purchased a property after While fixing for longer periods can offer stability – something that many may be drawn to amidst so much economic turmoil – there are some drawbacks to be aware of

borrowing at 60 per cent LTV, fixed over a long period. A couple of years into the loan, the landlord learns that they need to spend a significant amount upgrading the property in order to meet new energy-efficiency regulations. While they would likely have enough equity in the property to finance the works, they are unable to access it due to the lender not allowing product switches or further advances to be taken out. An increase in investors fixing over longer terms also has implications for brokers.

When changes to underwriting, introduced by the PRA in 2017, increased the proportion of landlords taking out five-year fixes, it removed some opportunities for re-brokering after two years. A rise in five-, seven-, and even 10-year fixed-rate mortgages would mean this would be repeated to some degree, so while brokers pride themselves on finding the best products for their clients, lenders may need to consider how to compensate those who have helped to secure them long-term customers.

For me, all of this shows how the role of the broker is as important as ever; providing sound advice can help landlords to make informed investment decisions that have a real impact on their lettings businesses and on the millions of people who turn to the private rented sector for largely good-quality, affordable homes. M I