Update on legal, regulatory and tax changes in the residential mortgage and buy-to-let markets in 2016 and beyond

As we prepare ourselves for another year of predicted growth in the UK residential housing sector a number of important legislative, regulatory and tax changes will begin to be implemented as soon as March 2016 which will directly affect the residential mortgage and buy-to-let (BTL) markets.
 
Many professionals and practitioners have not yet begun to concentrate on their (in some case imminent) implementation and this article seeks to consider the potentially significant impact some of these changes will have on the residential mortgage and BTL market of certain of these changes will have, and which have already led a number of market participants reassessing how they participate in their respective markets going forward.
 
Key changes
 
1.  Full implementation of The Mortgage Credit Directive (Directive 2014/17/EU) into UK law on 21 March 2016.  A detailed analysis of this directive is outside the scope of this article but headline changes include full regulation of buy to let loans, the regulation of second charge loans and a number of new rules on the sale, distribution and administration of these loans in the UK alongside residential mortgage loans.
 
2.  The introduction of a surcharge of 3% on Stamp Duty Land Tax (SDLT) for BTL landlords effective from 1 April 2016 (announced in the autumn budget statement). 
 
3.  A phasing in commencing in 2017 of a reduction in the existing mortgage interest tax relief to 20% for BTL landlords who currently benefit from up to a 45% relief (dependant on their tax rate band) on interest payable on BTL loans.
 
Mortgage Credit Directive
 
The Mortgage Credit Directive or “MCD” is generally being seen as a progressive step by most market participants harmonising the playing field across Europe in this area and ensuring the majority of mortgage loans in the UK are now subject to regulatory scrutiny.  This should ensure fairer treatment for all borrowers, particularly second charge borrowers and take away some of the inequities in the treatment of first versus second charge borrowers. 
 
This increased regulatory scrutiny will no doubt drive some of the smaller second charge lenders and brokers out of the market but as most still operating are already making Consumer Credit Act regulated loans, and therefore are grandfathered and operating under FCA or PRU supervision, this change is not likely to be a difficult transition for those lenders who remain, subject of course to becoming fully authorised.
 
Janet Hall, principal of “the Mortgage Lady”, an independent and fully regulated mortgage and insurance adviser based in Oxfordshire who has been active in this market since mortgages first became regulated, is of the view that the changes may well lead to a few lenders and brokers leaving the market but this is likely to be more than offset by the entry of mainstream lenders as the second charge loan sector becomes more integrated with the first charge market. 
 
She notes also that “We would expect the current trend for second charge borrowing rates to move closer to first charge levels to continue as a result” which is clearly good news for borrowers in this market. 
 
Changes in the buy to let market
 
The net effect of the fundamental changes in tax treatment and regulation to a fairly buoyant buy-to-let market remain to be seen but anecdotal evidence is already appearing to suggest that rental prices are likely to rise and there may well be an immediate negative impact on market prices in certain parts of the UK.
 
The regulation of BTL lenders and brokers may well reduce their numbers in the market and may also dissuade new BTL landlords from entering the market.  However the BTL market is a fairly mature one in the UK and most of the larger lenders are already fully regulated as residential mortgage lenders.  The new regulation will almost certainly restrict the universe of lenders available and will potentially also increase the costs of borrowing in the BTL market.
 
A recent survey of over 1,000 buy to let landlords conducted by a large property website confirmed the following:
 
1. more than half said they expected the value of their BTL investments to fall considerably;
2. 54.6% of respondents believed that the 3% rise in Stamp Duty for buy-to-let investors was likely to affect the value of their investments;
3. two-thirds believed there would be a decline in the number of properties for rent;
4. 53% of existing landlords said that they would not be buying any more BTL properties following the tax changes
 
The changes being imposed on the BTL extend well beyond MCD and the actual changes inflicted by MCD are fairly superficial in this sector by comparison.  The introduction of ‘consumer buy to let’ bring the extra protection of The Financial Ombudsman and the Financial Services Compensation Scheme to clients in this category, but the majority of sales in this this category were operated on an advised basis, to regulated standards (albeit not actually regulated) anyway.  So far there is no real indication of market segmentation in terms of products available.
 
The recent SDLT charges (to most sectors, except possible the large professional portfolio investors) and previously announced future changes to the tax regime (to the smaller and mid-size landlords in particular) will have a much greater impact. 
 
We still await full detail of the effects of these changes and any subsequent policy changes from the lenders in this market will have.  Most Lenders have generally indicated that they will not be considered until the MCD has been implemented.  Mrs Hall and other advisers in the market we have spoken to expect the fairly immediate impact to be reduced transactions followed subsequently by a potential slowing of price inflation in typical investment properties and a hardening of rental prices as demand further exceeds supply. 
 
We also believe it is likely that there will be a resulting shift in the participation in the BTL market away from small private investors in the sector to professional investment landlords with 20 or more properties in their portfolios.
 
The SDLT changes in particular are likely to virtually remove the ‘let to buy’ and ‘accidental landlord’ marketplace in very short order as these sectors will be paying the 3% penalty on any new purchase if they retain the properties.  This will we believe further accelerate the rental property shortage, inevitably increasing rental prices and exacerbating the market swing towards professional investment landlords.
 
Summary
 
As these changes to the mortgage and BTL market work their way through to full implementation over the coming months and years we will continue to monitor the effects of these fundamental changes and work closely with our clients to assist them in managing their regulatory and legal risk in the changing environment helping where possible to mitigate some of these risks through robust structuring, practical legal advice and sensible tax planning for portfolio owners.

Simon Hopewell is a partner at Knights Professional Services, one of the fastest growing national legal firms in the UK, and one of the first in the UK to attract private equity investment.  He has 20 years' experience in advising lenders in mortgage, development and investment markets and spent a period as general counsel of a large FTSE listed mortgage lender.  He has particular expertise in advising lenders and intermediaries on regulatory issues and advising buyers/ sellers in the purchase/sale of portfolios of mortgage loans, credit card loans and other debt receivables.

Simon can be contacted on +44 (0)1242 541 004  or by email at simon.hopewell@knights1759.co.uk

Henry Davenport is also a partner at Knights Professional Services and is a qualified chartered accountant.  Henry heads Knights tax team and has over 25 years’ experience advising on corporate and personal taxes associated with transactions involving owner-managed businesses.  He has particular experience advising on stamp duty land tax, VAT and capital allowances with regard to commercial property transactions and all aspects of direct and indirect taxation. 

Henry can be contacted on +44 (0)1782 349 544 or by email at henry.davenport@knights1759.co.uk

Janet Hall is an independent mortgage adviser who has run her ‘Mortgage Lady’ practice based in South Oxfordshire since 2008, providing a national mortgage and insurance advice service covering a wide range of market sectors.  Janet first qualified in 2004 and worked for Police Mortgages (Hatch Associates) and The Thinc Group before establishing ‘The Mortgage lady’.  

Janet can be contacted on +44 (0) 0330 999 1955 or by email at janet@themortgagelady.co.uk