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Extent of landlord exodus to limited companies revealed

Landlords are increasingly transferring properties to limited companies to navigate tax changes in the buy-to-let market, according to lender data.

Figures from Shawbrook Bank showed the proportion of buy-to-let mortgages completed by individual landlords had fallen from 68 per cent in the first half of 2015, to 34 per cent in the same period of 2018.

Meanwhile the proportion being completed by limited companies had doubled from 32 per cent to 64 per cent in the same period.

The buy-to-let market grew rapidly after the financial crisis but tax changes and the introduction of stricter affordability testing meant there was steep fall in the number of buy-to-let mortgages.

The introduction of an additional 3 per cent stamp duty surcharge in April 2016 was closely followed by the abolition of mortgage interest tax relief for landlords, to be phased down to a 20 per cent flat rate in 2020, further pushing the limits of landlord profitability.

Buy-to-let borrowers are also now subject to more stringent affordability testing under the Prudential Regulation Authority’s tightened underwriting rules.

Shawbrook Bank has said the reduction in mortgage interest tax relief had led to an increased professionalisation among landlords, with those in a private limited company able to treat interest payments as business expenses to be offset against profits.

Gavin Seaholme, head of sales at Shawbrook Bank, said the buy-to-let figures showed individual landlords were moving across to limited companies but warned this may not always be suitable.

He said: “Firstly, borrowing through a limited company structure is generally more expensive than for an individual, offsetting some of the expected tax savings.

“Secondly, for private landlords with existing portfolios it can be very costly to actually transfer the properties into limited company ownership due to capital gains tax which is due upon the sale and stamp duty due when the newly set up company purchase the properties.

“Together these one-off payments can leave a significant dent in the finances of buy-to-let investors, which makes careful planning necessary.”

Mr Seaholme said the more favourable option could be to convert or create a limited company to continue on the property journey, subject to the correct tax and planning advice.

In its assessment of the buy-to-let market in July, Shawbrook Bank predicted demand for buy-to-let mortgages would fall further over the coming years and expected many landlords to only feel the true impact of changes next year when filing their tax returns for 2017-2018.

Stuart Gregory, adviser and managing director at Lentune Mortgage Consultancy, said since the amendments to taxation for landlords were announced he had seen a big downturn in enquiries for buy-to-let purchases.

He said: “Those we have received have been related to limited company buy-to-let, which does indicate a shift of opinion.

“However, the biggest issue will be as, and when, the landlords’ accountants raise the onward issue of the new taxation – we fully expect to see some more existing landlords to thin out their portfolios, which will of course increase the property supply potentially for first-time buyers.”

But Andrew Turner, chief executive at buy-to-let broker Commercial Trust, has advised to ignore the “doom-mongers” and stressed the buy-to-let market was thriving.

He said: “It was inevitable that tax changes, which could potentially suppress profitability in the short term, would impact upon the perceived desirability of buy to let investment.”

The changes were expected to be most keenly felt by those with fewer properties, Mr Turner said, because adjusting would be a more painful process for new investors or those with less experience.

He added: “However, the simple fact is that buy-to-let remains a solid investment option, with strong potential for an attractive and profitable return on capital invested.

“Investors should not be deterred – demand for rental housing is stronger than ever, the cost of
debt remains relatively cheap and the housing shortage is likely to continue. Even so, any investment decision requires care and expertise.

“The real story has really not been about buy-to-let becoming unattractive as an investment option.”

Source: FT Adviser

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The big problems facing buy-to-let investors in 2019

There’s no two ways about it, the buy-to-let market has become much more challenging for investors of late for a broad variety of reasons. And landlords need to be braced for conditions becoming even tougher in the months ahead.

One problem I previously touched on is the impact that the Bank of England’s recent interest rate rises have had on driving buy-to-let mortgage costs higher again. And the trend is expected to continue into 2019 and probably beyond.

Andrew Turner, chief executive of dedicated buy-to-let lender Commercial Trust, was bang on the money when he commented this week that the current environment of exceptionally-low mortgage rates “will have to change.”

Turner said that “the bumpy road of Brexit may see the base rate brought down slightly, once things settle, but I think it is unlikely and in any event, there is not too much scope for reduction.” He added that “my view is that the overall picture for the next decade is a gradual upward trend in rates.”

Rates poised to rise That said, recent commentary from the Old Lady of Threadneedle Street released earlier this month suggests that any reduction in borrowing costs in the short term or beyond to support the economy in the event of a catastrophic no-deal Brexit cannot not be considered a given.

As the Bank of England explained in its most recent minutes, “the economic outlook will depend significantly on the nature of EU withdrawal,” and that therefore “the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.” Indeed, should sterling dive in response to the UK’s Brexit strategy, the committee may have no choice but to hike rates in an effort to tame a likely surge in inflation.

A property price crash? Another clear risk of a disorderly Brexit in the spring is the possibility that house prices in the UK could fall off a cliff.

The property market crash that many had predicted in the event of a Leave campaign victory in June 2016 may not have transpired. But home price growth has slowed to a crawl, the latest home price inflation gauge today showing expansion of 3.5% in September, more than halving from the 7.7% rise posted exactly two years earlier.

The impact that Brexit is having on homebuyer confidence has proved devastating, and the problem was again highlighted by Foxtons this week, the estate agency advising that it had recently closed another six branches in and around London in reflection of the “challenging market.”

Demand from first-time buyers may still be strong, but the uncertain outlook for the UK economy has seen transaction activity from existing homeowners slow to a crawl. And I would expect buying appetite from both of these demographics to sink, at least in the immediate term, should Britain fall out of the EU with a bang.

The buy-to-let sector is becoming more and more of a minefield for investors and for a variety of economic and political factors. In my opinion it’s a sector that is far too high risk and I think that savers should seek other ways of deploying their cash, like stock market investment, to generate solid returns.

Source: Investing

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UK Finance: Buy-to-let purchase activity well below expectations

Buy-to-let purchase lending will likely reach just £9bn this year – £3bn short of UK Finance’s £12bn forecast at the start of the year.

Jackie Bennett, director of mortgages at UK Finance, told delegates of the stark news at the trade body’s annual mortgage conference this morning.

She said: “Buy-to-let has not fared so well this year.

“Our forecast for 2018 was for around £12bn of buy-to-let purchase – the market looks like it will considerably undershoot this, coming in at more around £9bn.

“This is undoubtedly the impact of various tax, regulatory and legislative changes that have happened to landlords in the buy-to-let sector.

“And with the 2018 tax bills dropping through landlords’ letterboxes, or more likely in their inboxes these days, we are yet to see what further impact this may have on the market.”

She wasn’t all doom and gloom however.

Buy-to-let remortgaging has gone the other way, with lending likely to reach £27bn, up from the £24bn forecast at the start of the year.

Bennett also brought up the subject of product transfers in buy-to-let, as this data isn’t currently available, unlike with residential.

She said “it wouldn’t surprise me” if buy-to-let product transfers are “as strong as the residential market”.

Later in the day Yolande Barnes, professor of real estate, Bartlett Real Estate Institute, UCL, did little to quell fears about buy-to-let.

Indeed she said the market will likely be moderately down again on current levels come 2023.

Source: Mortgage Introducer

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Is buy-to-let property a better investment than stocks?

Buy-to-let property has historically been a very popular for British investors. And in the past, they’ve generally done well from BTL, profiting from both house price appreciation and solid rental yields.

But is investing in a buy-to-let property a better idea than investing in the stock market? Right now, I’m not so sure. Here’s a look at four reasons stocks beat BTL as an investment in the current market environment.

Higher income

With UK property prices having soared in value over the last decade, the rental yields on offer from BTL properties are generally quite low at present. This is because rent prices haven’t kept up with property prices. While it’s still possible to find hot spots that do offer high rental yields if you do your research, the average nationwide rental yield is just 3.6% at the moment, according to insurance specialist Direct Line.

With stocks, you can potentially pick up a yield that’s significantly higher than that with much less effort. As I detailed here, it’s not that hard to put together a simple blue-chip portfolio that yields around 6% at present. Furthermore, if you invest within an ISA, that income will be tax-free. A 6% yield tax-free for doing nothing? That a no-brainer to me.

Less hassle

Another key advantage that stock market investing has over BTL property is that it’s significantly less hassle. With stocks, you can invest in a portfolio and then leave it to work for you. Essentially, you’re letting company management do all the hard work while you spend your time doing what you enjoy.

However, with BTL property there’s a whole lot of things that need to be taken care of. For example, you need to ensure that your property is always tenanted (with good tenants). If your property is without tenants for a few months, or your tenants don’t pay the rent, you may have to fork out the mortgage payments yourself. You also need to make sure all repairs are sorted out promptly. And don’t forget all the new BTL regulations that is making life more stressful for landlords, such as minimum energy ratings. In short, BTL is a lot of effort.

More liquidity

Another benefit of stocks is the liquidity that they offer. If you want to take some profits off the table and free up cash, you can. Hit the sell button and your money will be in your bank account within days. The same can’t be said for property. You can’t just sell one bedroom, can you? If you do want to sell your property, you’re looking at a lengthy process and a load of fees.

Better diversification

Lastly, stocks allow you to spread your money out more effectively than property does. With a BTL property, you’re putting all your eggs in one basket. What happens if UK property prices tank as a result of Brexit? In contrast, with stocks, you can invest in many different companies, sectors and geographical regions, and this can help lower your investment risk.

Buy-to-let property has been a good investment in the past, but with low yields on offer at present and new regulations making life more difficult for landlords, the asset class is losing appeal. In my view, a long-term investment in the stock market could be a better idea.

Source: Yahoo Finance UK

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Autumn Budget 2018: Industry pleased the Chancellor left buy-to-let alone

Some buy-to-let professionals were pleased Chancellor Philip Hammond didn’t introduce any further buy-to-let taxation changes in his Autumn Budget.

Andrew Turner, chief executive at specialist buy to let broker Commercial Trust, felt the move to raise income tax thresholds could be good news for some buy-to-let borrowers.

He said: “Certainly there had been speculation beforehand that the Chancellor might increase stamp duty on second homes, but in the event, these proved unfounded.

“There was very little mention of landlords at all and perhaps the most significant aspect of this Budget, was the raising of personal income tax allowances to £12,500 for basic rate and £50,000 for higher rate, from April 2019.

“This could represent good news for some landlords, who are borderline higher rate tax payers at the present threshold of £46,351. If these landlords suddenly find themselves in the lower tax bracket from next April, they might benefit from more generous borrowing calculations on some buy-to-let products.

“This is because some lenders apply less strenuous rates in their income calculation ratio (ICR) assessments for non-tax payers and basic rate tax payers.

“This could result in some formerly higher rate tax payers being able to borrow more money on selected buy-to-let mortgage products, if they do drop out of the higher rate tax bracket into the basic rate.”

Toni Smith, chief operating officer, PRIMIS and Personal Touch Financial Services (PTFS), said: “It will undoubtedly be a relief for many landlords that the Chancellor has moved his focus away from the buy-to-let market in this Budget – a sector which is still getting its head around recent regulatory updates.

“This decision will hopefully afford landlords the time they need to take stock of their positions, and work to consolidate, or potentially grow, their portfolios.”

Similarly Peter Izard, business development manager at Investec, agreed and also welcomed Hammond cutting stamp duty for shared ownership properties valued at up to £500,000.

He said:  “It was pleasing to see the Chancellor did not make any major changes to taxation in the buy-to-let sector or in stamp duty apart from the positive changes in shared ownership stamp duty.

“Investec considers the housing market requires a period of certainty and the lack of changes will be welcomed.

“The Chancellor announcements in the budget on the £500m increase to the housing infrastructure fund to support SME housebuilders are welcomed by Investec.

“The UK continues to suffer from a shortage of new housing to meet supply demands.”

Source: Mortgage Introducer

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This is the best place for buy-to-let investors to buy!

It’s no surprise that the UK buy-to-let market is suffering a crisis of confidence right now. Landlords are becoming jittery over the stagnation (or in the case of London, painful decline) in property price growth over the past couple of years, not to mention tales of a possible market collapse in event of a cataclysmic ‘no deal’ Brexit.

They’re also becoming more and more troubled over the growing raft of regulations befalling the sector, a natural consequence of politicians trying to curry favour with the growing number of young and middle-aged adults still stranded in the rental trap.

Indeed, recent data shows that in this climate, landlords are more likely to reduce the size of their property portfolios than to buy up more bricks-&-mortar assets.

Irish eyes are smiling Sure, conditions might be tough in Britain, but there’s still plenty of opportunity for buy-to-let operators to make a fortune. They simply have to look a little further afield.

Ireland, for instance, has proved a lucrative hunting ground for property investors for years now. A report from WorldFirst shows that little has changed.

The Emerald Isle just took top spot on the international payments specialist’s European Buy-To-Let League table for the third year in a row, with the average rental yield there registering at 7.69% in 2018. By comparison, the average rental yield in the UK stands at 4.67%, it said.

Commenting on the data, WorldFirst said that “investors in Ireland’s property market have benefitted from significant returns due in large part to reasonable property prices in comparison to soaring figures in other Western European countries. A stable euro, continued economic growth and consistent rental demand have also contributed to the country’s performance.”

WorldFirst said that while sterling has plunged around 17% over the past three years against the euro, Ireland still continues to offer strong returns for investors. It noted that “while a one-bedroom city centre apartment would now set you back almost £11,000 more than it would have this time last year (+6%), the good news is that average rents have risen by £127 (+11%) per month.”

UK buy-to-let remains robust That’s not to say that the British buy-to-let market is totally unattractive, though. Strong rental demand means that average rents in England and Wales were up 2.6% year-on-year in September, according to estate agency YourMove, a rise which WorldFirst attributed to landlords increasing rents in response to the government’s decision to axe tax relief for proprietors.

All things considered, though, I believe that investing in stocks is far superior to taking the plunge in the rental market here or abroad. Indeed, if approached the correct way, buying into share markets has the capacity to make the sort of returns that most buy-to-let landlords can only dream of.

Source: Investing

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Thinking of investing in buy-to-let? Read this first

Buy-to-let property investing has boomed over the past few decades. It has become a popular way of generating wealth as investors have benefited not only from a regular monthly rental income but also soaring property prices.

However, over the past two years, the buy-to-let landscape has changed dramatically. And if you’re planning on getting into this market, there are several factors you need to consider first.

Rising costs

Firstly, renting out property is no longer as lucrative as it once was. During the past few years, to try and cool the housing market the government has tweaked the tax system to make buy-to-let investing less attractive to investors.

A 3% stamp duty surcharge on second homes and a gradual reduction of mortgage interest tax relief, which will reach the basic rate of 20% for all landlords by 2020, will weigh on returns for all investors going forward.

What’s more, the government has been introducing regulation to stop rogue landlords taking advantage of tenants and increasing tenants’ rights.

The cost of complying with these increasing demands could be too much for small-scale landlords.

Extra work

Secondly, as a landlord, if something goes wrong with the property you will have to find the money to pay for it and organise repairs. On top of this, finding and vetting tenants can be time-consuming.

Of course, you could pay a letting agent to take care of everything, but this would consume more of your rental income. Fees amounting to 10% or more of the monthly rent take are common.

Slim returns

Thirdly, for all the time and effort involved managing a property, the returns aren’t that attractive.

Using a back-of-the-envelope calculation, the average tenant’s rent bill was reported as being just over £900 per calendar month at the beginning of this year. That’s around £10,800 per annum. At the same time, the average home price at the end of Q1 was in the region of £226,000, or £232,780 including the stamp duty surcharge.

Based on these numbers, I estimate the average rental yield is 4.6% for landlords getting into the market today. If you deduct a 10% per annum letting agent fee and income tax, you’re left with a yield of around 3.4%. I should, at this point stage, that these figures are only rough estimates.

Also, many buy-to-let investors use mortgages to improve returns, this adds another variable and cost. With these tiny profit margins, it will only take one broken boiler or leaky shower to eliminate a year of income.

Capital gains are usually a significant factor in buy-to-let investors’ considerations as well. Here the prospects are brighter. Mid-single to low-digit home price growth is expected for the next few years, although this will differ between regions. Still, if you take a 3.5% annual income and, say, 2.5% yearly capital appreciation, buy-to-let investing could, according to my figures, produce a 6% return.

Conclusion

Personally, I’m not convinced that this level of return justifies all the work involved. There are equities in the FTSE 100 which support a dividend yield of more than 7%, and with these stocks there’s much less work involved.

So, after considering all of the above, it seems to me that the best days for buy-to-let investing are now over.

Source: Yahoo Finance UK

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Buy-to-let presents challenges to lenders and landlords alike

From seeing the opportunity to underwriting complicated company structures, lenders need commercial underwriters to assess properly the opportunity to lend in buy-to-let.

A year on from last September and the aftershock of the buy-to-let changes issued by the Prudential Regulation Authority are still being felt as a market so long left to its own devices has started adapting to increased regulatory scrutiny.

The more stringent rules on mortgage lending for buy-to-let landlords has meant the near two million ‘hobby’ landlords who own 15% of the housing market have found it increasingly difficult to raise finance from traditional lenders.

This is not the only headwind. The government’s introduction of the 3% stamp duty surcharge on second homes in April 2016 and withdrawal of tax relief by 2020 also present challenges for the sector.

As with all regulatory change the desired outcomes have also inspired some less desirable behaviour. There has been a rush to place buy-to-let investments to into limited company structures by some brokers with an impact on clients’ tax positions and consequently and unwillingness of some lenders to support lending to these structures.

But in addition, the skills in lenders to read balance sheets and understand how company structures and law affect lending positions are thin on the ground.

Equally many ‘hobby’ BTL landlords have turned to Houses of Multiple Occupancy in an effort to improve yields unaware of the many more stringent rules that accompany these kinds of dwellings.

The BTL landlord has been hit, albeit slowly over the last few years. Although the powers-that-be seem to be managing the ‘hobby’ investor out, whether they are going to succeed is less clear. Foreign property investment funds are already operating successfully in London and benefitting from the discount that our ‘post brexit’ currency offers.

If it was the government’s intention to flood the market with ex-BTL property as a vote winning strategy and an attempt to ease the housing crisis, It’s not clear this is working.

More property is on the market in London but because so much hobby BTL is funded on residential borrowing there is little hard data to know if this stock was rental or not.

Notwithstanding this technical point, owner-occupiers are still finding it hard to save a deposit (according to ONS data, tenants in London spent nearly half (49%) of their salary on rent). A look nationwide at the cost of a property relative to earnings is even more illuminating; for England and Wales in 1997 it was around 3.6 times earnings, whilst in 2016 it had more than doubled to 7.6 times.

But we should remember that the housing market is not homogenous. In a recent survey of over 680 landlords carried out on behalf of the firm Paragon, it was revealed that buy-to-let mortgages for property purchases have fallen by around 40% overall since 2015.

But landlords in the Midlands, however, seem to be bucking the trend, amplified by strong economic growth in the region, a thriving higher education sector and successful regeneration of Birmingham.

There is also a boost from the relocation of head office and operational functions outside of London to Birmingham by financial service firms – including HSBC and Deutsche Bank – with heightened activity ahead of the Birmingham 2022 Commonwealth Games.

What’s more, 42% of landlords in the East Midlands and 33% of landlords in the West Midlands said tenant demand was increasing, compared with just under a quarter of all landlords (24%) who indicated rising demand.

There is evidence to suggest that the sales are not as desired to owner-occupiers but simply the transfer of assets from one investor to another. These investors have full knowledge of the tax environment, and at the appropriate LTV and rent to withstand the stress testing.

As a result, property is becoming less about instant and fast capital gain to compensate for the low yield and more about a sensible yield from purchase with a projected modest capital gain. This is far more in line with why property as an asset class has historically been viewed as a desirable investment instrument.

What is clear is that proper investing in the sector now requires levels of expertise previously not required. From seeing the opportunity to underwriting complicated company structures, lenders need commercial underwriters to assess properly the opportunity to lend.

The sector may not offer the eye-catching capital returns it once did, but it has returned to its historic asset characteristics, offering investors a reasonable yield and a hedge against inflation. Buy-to-let is alive and well.

Source: Mortgage Introducer

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Buy-to-let vs the stock market – which is better?

Buy-to-let property investment is a popular way of generating wealth in the UK. And many buy-to-let investors have done well over the last decade, as not only have they received rental income but they have also generated sizeable capital gains as property prices have soared.

But is buy-to-let investing better than stock market investing? That’s hard to say, as both have their advantages and disadvantages. If you’re considering whether you should invest in a buy-to-let property or buy stocks, here are four issues to consider:

Capital outlay

The first big difference between buy-to-let investing and the stock market is the amount of capital you’ll need to get started. If you’re looking to buy a property, it’s likely you’ll need a fairly large deposit. Buy-to-let mortgage requirements are stricter than ordinary mortgage requirements (and you’ll have to be approved) so you may need a deposit of 20%-40% of the value of the property. Also, don’t forget stamp duty. This varies depending on the value the property but could make your purchase considerably more expensive. For example, stamp duty on properties valued between £250,001 to £925,000 is 8%. You could be looking at a large sum to invest in a buy-to-let property.

In contrast, with stocks you could potentially get started with just a few hundred pounds. So, in this regard, stock market investing does have an advantage.

Cashing out

It’s also important to consider how easily you can cash out of your investment if you wanted to. Again, stocks have an advantage here, as in general, they are very easy to sell. Normally, you’ll have your cash back in your bank account in a matter of days. In comparison, it could take months to sell a property. And you’re likely to incur significant fees in the process.

Spreading your risk

Another issue to think about is diversification. With a buy-to-let property, all your eggs are in one basket, which adds risk to the investment case. For example, what if you buy a UK property and prices fall by 20% due to Brexit?

In contrast, with stocks, it’s easy to spread your capital over many different investments and reduce your risk. Stock market investors can invest across different geographic regions (UK, US, Europe, Asia, emerging markets etc.), different sectors (technology, financials, healthcare etc.) and different sized companies (large-cap, mid-cap, small-cap). That way, if one particular area underperforms, it should be offset by stronger performance in other areas.

Regulation

Lastly, don’t forget regulation. In recent years, the UK government has had buy-to-let investing in its sights, and there are now far more regulations that impact investors. For example, landlords now need to check whether tenants have the right to live in the UK, and buy-to-let properties now need to have a certain energy rating. There’s also talk of a UK-wide landlord licensing system and regular rental property inspections. When you consider the extra stamp duty payable and the fact that by 2020 no mortgage interest will be deductible from your tax bill, the attraction of buy-to-let has certainly diminished in recent years.

When you consider the four issues above, stock market investing clearly has advantages. That’s not to say buy-to-let doesn’t have a place within a diversified investment portfolio, but investors do need to be aware of its drawbacks.

Source: Yahoo Finance UK

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One in five intend to stay in buy-to-let indefinitely

One in five landlords intend to remain in the buy-to-let market indefinitely, with the same number of portfolio landlords foreseeing the same, the latest sentiment research from Foundation Home Loans reveals.

Unperturbed by recent regulatory and tax changes paving the way for exit and indications of a ‘mass exodus’, 18% of landlords said they would expect to remain a landlord indefinitely, and 19% of landlords with four properties or more said the same. This is the same across the age groups: one in ten landlords aged 18-34 intend to remain indefinitely, rising to 17% of those aged 35-54 and 20% of those aged 55 and over.

At a regional level, a quarter (24%) of landlords in the East of England – more than any other region – said they had no plans to leave the market, a sign of the draw of rental property in the commuter belt. On the flip side, 6% of all landlords questioned said they only intended to remain a landlord for the next one to two years.

What’s more, today’s portfolio landlords expect to stay invested in the market for an average of 15 years, compared to 10 years for non-portfolio landlords. One in five (20%) portfolio landlords have been a landlord for 16-20 years, showing that, with enough time to develop experience, monitor the value of properties and even make renovations to their offerings, the buy-to-let market can prove worthwhile for this group especially.

Jeff Knight, marketing director, Foundation Home Loans, said: “There have been ripples of concern that a mass exodus of landlords is expected, and certainly the changes introduced are a handful to deal with if not addressed in the right way. But this is clearly an exaggerated view of the market.

With so much interest in investing in the long-term, it is therefore imperative that newer landlords are sufficiently supported to avoid any knee-jerk exits. This is particularly the case for portfolio landlords as diversification is key to maintaining cashflow. Seeking the help of a financial adviser will help landlords navigate these hurdles, professionalise their approach and ultimately ensure they can remain in the market.”

Source: Mortgage Introducer