Landlord Survival: How to survive the economic turmoil

How can landlords survive the economic turbulence?

Well, what a time to be a landlord! Anyone who’s only glanced at the news for the past few months will know already that the UK is in deep economic turmoil, with the costs of energy, food, fuel and borrowing all on the up and up. Everyone’s being squeezed, and the private rented sector is being hit hard.

From tax squeezes to mortgage rate hikes to new legislation around the corner, the twists and turns just keep on coming, and we can hear the cries of ‘I’m a landlord, get me out of here!’

But are there ways to survive the harsh realities of today and emerge in a slightly less terrifying future? Yes, say the experts.

If ever we need to hear from the best in the business before taking the next step it’s now. What’s their latest advice? Is this like the 2008 financial crash? Who can make things better – and how? And what’s around the corner?

This week’s Mashroom Show calls on several heavyweight industry experts to answer those questions, and many more. This post covers what they had to say, or you can watch below.

Here’s what we talked about:

  • Mortgage and housing consultant Stephen Smith uses his 40+ years of experience to unpack the current package of challenges on landlords’ doorsteps, and how we got here
  • Property Tribes’ co-founder Vanessa Warwick weighs in on what created the tricky conditions in the sector – and she has a strong message to the new government.
  • Mashroom mortgage adviser Robert Winfield gives us the latest on the mortgage market – and there’s some good news, finally!
  • Nottingham’s cracking down on cold rented properties – is your area next?

Delayed pain

Stephen Smith is a financial services consultant and director, and he’s got over forty years of experience in the mortgage and housing industry. He’s seen quite a few ups and downs in the sector since the 1980s and he has valuable insight into the situation and how landlords can survive the crisis:

According to the Bank of England, 83% of all borrowers are currently on some form of a fixed-rate deal. 1.8 million of those deals are due to end in 2023. So a huge number of people are going to be reaching that sudden shock point of having to pay dramatically more on their repayments within the next 18 months.

Indeed, over half of all landlords will be coming to the end of their fixed deals by the end of 2024, and if their new deals are just four percentage points higher than their current deal, 38% will find their current property becomes either unmortgageable or makes a loss.

How did we get here?

There are many aspects to the housing crisis, Stephen points out, but what’s at the root of it? The supply slump is one factor:

“The fundamental issue is the lack of supply – a lack of good quality, affordable housing that people want to live in. As a country, we simply haven’t been building enough homes – not just in the last few years but frankly for decades.”

Due to the supply slump, we’ve seen a price surge. 

It’s a simple, inevitable mechanism, Stephen explains. “When supply is constrained and demand continues to rise, prices have to go up. And frankly, most government schemes, from Help to Buy through to Stamp Duty holidays, simply increase the demand side and do nothing for the supply side.”

On the tenant side of things, rising costs mean that many are trapped in the rental sector, due to the cost of rent preventing them from saving for a deposit: 

Survey after survey shows three quarters of people want to buy their own home, but the reality is nowhere near that level.

The recent sharp increase in the cost of everything from food to borrowing certainly won’t be doing anything to help people achieve their homeownership goals, either.

But there are other factors to consider. The way society has changed over the past few decades has shaped the housing industry too, Stephen points out: ‘The population’s been growing – just natural growth with some minor effects from immigration, but we’ve seen a big increase in the number of single households due to people getting married later, and also the rise in divorce.’

Have we been here before?

How does Stephen think this compares to previous ‘interesting times’ like 2008, or the early 1990s, or 1979, when interest rates were at a truly hair-raising 17%?

  • One key difference between now and the 2008/9 financial crash is how lenders are reacting, says Stephen. ‘Lenders are currently very keen to lend,’ he emphasises. ‘This isn’t like 2008/2009 when lenders didn’t particularly want to lend.’
  • Today is remarkably different from 30 years ago, he reminds us. ‘Back in 1990, the average household annual income in the UK was around £20,500 and the average house price was about £58,000 – that’s 2.8 times the annual income. But by 2020, the average house price was £238,000, and the average household income had only risen to £37,100. So you’re looking at the house being 6.4 times the income. That’s an immense increase, made affordable by the ultra-low interest rates we’ve had.’
  • And the 1980s were even more different: ‘Back then, literally all mortgages were on variable rates. There was a time in 1980 when interest rates rose 2.5% overnight – literally overnight. The monthly payments weren’t even enough to cover the interest, so the mortgage term went ‘infinite’. But now, with so many mortgages being on fixed rates, the pain of rate hikes unwinds over time, when a deal expires and you have to refinance.’

It’s not escaped Stephen that for every mortgage holder worried about their costs, there seems to be someone rolling their eyes and talking about how they had it worse in their day: ‘I’ve seen a number of people saying, ‘Well, when I was a first-time buyer I had to pay 15%, so why are you complaining about 4.5 or 5%?’ The truth is, property prices and the amount borrowed have both risen hugely, and an interest rate of 4% today is the equivalent of a 14% rate back in the day, so that’s actually what all the fuss is about.’

Could lenders hold the key to a less painful EPC upgrade process?

Stephen’s no stranger to the energy efficiency demands on the sector: ‘I think overall we’d all agree better energy efficiency is a good thing, but one problem is that there’s a disparity between what the experts say needs to be spent on a property and what landlords are expecting. It’s already having an impact, and already reduced numbers of rental properties coming to market, which is the opposite of what’s needed, given the skyrocketing demand.’

‘I think this issue has to land on the shoulders of lenders. They have a real incentive to get this going. Statistics show that something between a quarter and a third of all buy-to-let mortgaged properties have an EPC lower than C, so that’s huge numbers for each lender. Lenders should be falling over themselves to lend. But it comes down to education and communication, and I’m still also seeing surveys of landlords – albeit small numbers – who aren’t aware of the requirements to improve their properties. So education and communication are needed. But landlords also need to wake up and take action.’

Saving graces?

So, we’re in unique, but challenging times still. However, Stephen is keen to add that there are a couple of positives:

  • ‘All borrowing done in the past eight or nine years will have been stress-tested.’ In essence, this means that the lender will have checked that the deal would be affordable for the borrower even if the interest rates went up. “So borrowers should be able to make their monthly repayments without going into arrears, but of course, the cost-of-living crisis is adding significant pressure.”
  • The employment picture is different. ‘We actually currently have very low unemployment, unlike the mass unemployment that we had back in the early 1990s. Back then, people were made redundant and many had to give up their homes.’

Powers and policy

There’s a sense of ‘something must be done’, but is help coming? The new government, headed by Rishi Sunak following Liz Truss’s departure, is saddling up and getting to work – so how might the industry be affected?

  • There’s talk of a confidence-boosting ‘Rishi Effect’, which seems to have influenced some lenders to drop their rates
  • Sunak wants to make sure communities have the infrastructure needed before new homes are even built
  • He’s a fan of removing barriers for smaller builders and encouraging modern methods of construction
  • He supported the Renters’ Reform Bill and the Fairer Private Rented Sector White Paper, as well as Covid eviction bans
  • The new housing minister Lucy Frazer is herself a landlord, and she has in the past suggested it was high time for landlords to regain some power and control over their assets
  • Michael Gove – the newly appointed Secretary of State for Housing – has reaffirmed his commitment to building 300,000 houses a year, which could finally start to address the shortage of decent homes
  • The next economic statement, out on 17th November, will reveal much more about where the new government’s priorities lie. It’s not in the government’s interests to allow millions of people to go bust and for the sector to go up in smoke, so it doesn’t seem unreasonable to expect some interventions

The landlord’s perspective

Many are daring to hope that the new policymakers have a good enough grasp on the sector to move things forward – but that might involve backtracking on previous legislation, as Vanessa Warwick – professional landlord and co-founder of Property Tribes – points out:

In 2015 this very onerous tax regime was introduced by George Osborne, which was called Section 24, and it really reduced landlords’ profit margins. Then we’ve had increasing regulation and taxation, and there just doesn’t seem to be an end to it. And on the horizon, we’ve got the removal of Section 21 and new EPC legislation.

All of this means one thing: ‘The cost of being a landlord has increased dramatically. There’s also great concern about being able to regain possession of your property, and even with Section 21, you could have to wait up to a year for a court hearing to get your property back. Landlords’ margins are being eroded left, right and centre. And uncertainty is very bad for landlords.’

Scrapping Section 24: a quick win for the government?

If the government did only one thing, Vanessa is very clear on what that should be: ‘They should remove the Section 24 tax regime.’

‘You’ve got the central government deterring landlords, and meanwhile, local government is crying out for landlords because they don’t have enough social housing to complete their obligations, so they rely on private landlords.’

‘They need to encourage private landlords back into the sector, and removing Section 24 would be the quickest way to do that.’

What can landlords do to help themselves?

Now is the time to make your plans so that you can survive the storm. So what does Vanessa recommend?

Consolidation mode

Vanessa describes her approach to the challenges of the past few years: ‘I’ve been in a holding pattern for the past few years, because I built my portfolio relatively quickly, from about 2005 to 2009. At that point, I went into consolidation mode, not least because at that point it became much more difficult to get finance.’

‘I’m in the process of selling a couple of my properties which aren’t performing well. They’re also on standard variable rate mortgages, so the rates are going up dramatically at present. I feel that the time is now to cash out and build a cash buffer to survive the challenging times that are definitely coming for landlords, and maybe be in a position to do something more in the future.’

Get to grips

But what’s Vanessa’s general advice to fellow landlords?:

We can’t control what the government is doing, we can’t control what the economy is doing, we can’t control what’s happening in Ukraine, so we have to look at what we can control. That means our assets: controlling them, maintaining them, keeping them in a good state of repair and compliant.

And the way you do business has never been more important, she adds: ‘Be very clear about whom you’re going to let into your property. Keep in mind it could take a year to remove a problem tenant, so make sure your referencing is robust. Look at everything you have control over and get to grips with that. Make sure you’re running your business as efficiently as possible, mitigating your risk every step of the way.’

Supported and steady

Stephen agrees that thoroughness is particularly important at the moment: ‘If you rush into something, you may lock into a rate with a lender that has penalties attached, and you may regret it in a couple of weeks’ time. The market is moving very fast, and until it settles again, at hopefully a lower level, you may rush in and secure something that you regret, so don’t rush, if you can avoid it.’

Secondly, Stephen warns landlords not to go it alone: ‘I have never seen a more complicated market,’ Stephen reflects. ‘You really do need advice, and that’s where talking to a good broker will pay dividends. They’ll give you the best market view and they’ll know how to secure the best deal with the relevant lenders that they select for you.’

‘The mortgage market is remarkably flexible in amending itself and providing the finance that people need, so that’s one glimmer of light,’ Stephen concludes. ‘We will find a path through.’

If you are looking for support when it comes to your mortgage, book a call with one of our advisors who will be able to help you.

Mortgage market – a bit of blue sky ahead?

One of Mashroom’s dedicated mortgage advisers, Robert Winfield, shares some good news about the mortgage industry: it seems it’s calmed down a bit. So, what’s happening in the mortgage team at Mashroom?:

‘We’ve been asked what will happen to profit margins, whether it’s worth expanding portfolios at the moment, whether it’s worth transferring products with current lenders, and what rates may look like in the future. It’s hard because it’s stuff we can’t predict. And it’s different advice for each individual, of course. But even if landlords don’t get the magical answers they wanted, we can give them some clarity or food for thought, so it’s definitely worth getting in touch.’

Product transfers

‘We’re doing a lot of these at the moment,’ Robert says. ‘A lot of lenders are really trying to pull out the stops to help out their existing customers. We’re seeing product transfer rates that are quite a lot better compared to new-business rates, so if you jump to a new lender it’s not as advantageous.’

Does buy-to-let have it worse than residential?

Yes, Robert says. ‘Buy-to-let has been hit harder because the stress-testing is more rigorous. If you want to know more about the stress-testing process, touch base with me and we can go into it in more detail. But, long story short, the stress-testing is a bigger factor for buy-to-let, which is making it more difficult.’

What counts as a good mortgage deal these days?

We’d all gotten used to deals under 2%, but of course, those deals aren’t around any more, Robert acknowledges: ‘At the moment the best rates on the market are mid-threes, and they’re normally on tracker products, which fluctuate in line with the Bank of England base rate. Fixed products, however, are somewhere between 5% and 7% depending on the lender. It’s all about high risk, high reward.’

Here to help

For landlords facing remortgaging soon, Robert has one key piece of advice: ‘Speak to a Mashroom mortgage adviser and do a budget planner in advance. See what scope you may have to find that additional cash if needs be. Sometimes it helps to sit down with an industry professional and run through what your actual outgoings are because we can sometimes show people where they can free up some money to put towards the mortgage. That’s what we’ve done for a lot of people, and it’s reassured them. Then we can try and work our magic with terms and go from there.’

To start your remortgaging process – or to talk about anything to do with mortgages – you can book a call with our experts, including Robert!

Nottingham gets tough on ‘cold homes’

Nottingham City Council is cracking down on rented properties with poor EPC ratings, so here’s a quick rundown.

  • The council is issuing fines of between £800 and £5,000 if a privately rented property doesn’t have an EPC rating of at least E
  • The size of the fine depends on factors like culpability and harm factors
  • With rising energy costs, having an energy-efficient home really does make a difference now more than ever, and a lower EPC rating means more chance of living in fuel poverty
  • Nottingham aims to be carbon-neutral by 2028, so this strategy will play a role in this goal
  • It’s entirely possible that other councils will be doing something similar soon, so we advise all landlords to keep on top of the latest regulations in your area – and of course, keep on top of your EPC rating 

If you haven’t yet done so, remember you can join our private Facebook community for landlords, where you can ask for sound advice from other landlords and the Mashroom advisers.

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