The financial environment appears to be getting tougher for buy-to-let
This week’s investment news is patchy for buy-to-let investors. As household debt surges and incomes stagnate, agents and landlords are being warned to take care when considering family members as guarantors. The government announced plans to cap rental deposits, which could dismay some landlords worried about the damage some tenants may cause – or tenants walking away owing rent. On a more positive note, Nationwide reports that house prices have bounced after three slack months.
What does all this mean? Read on for the property news and our views.
Is your tenant’s guarantor as safe as houses?
When you let a buy-to-let property to a new tenant, you might want to consider a guarantor to cover the rent should the tenant default. It is a particularly popular strategy when the tenant is young or untried or has a poor credit history. Often the parent or another family member serves as the guarantor. However, guarantor service Housing Hand has warned that guarantors may not be as solid as they appear.
Concerns arise because of increasing personal unsecured debt and stagnating household incomes. ONS statistics show that unsecured debt (on credit cards, store cards, hire purchase and personal loans) has increased to a record average of £13,900 per household. Take-home earnings are less than £28,000. Even homeowners could be unreliable as guarantors, with no guarantee that rent will be paid.
Rental deposits could be capped
The government introduced plans to cap rental deposits in the Queen’s Speech. Despite this, the total amount of deposits held in tenancy deposit schemes is set to soar over the next five years.
Currently, the average deposit held is £967. By the end of this parliament, it is forecast that there will be 24% more households renting in the private sector. On current deposit numbers, these extra renters will add around £2.3 billion to monies already held in tenancy deposit schemes. In total, by 2022 there could be £5.8 billion tied up in such schemes.
House prices are rising again
Nationwide has reported that UK house prices rose in June, with a rise of 1.1% month-on-month since May. It brings national house price inflation back up to 3.1%, and in the 3% to 6% range in which it has broadly remained for more than two years.
Regionally, London prices are rising at 1.2% per year. In the north, prices are up by just 1%. The strongest rises were witnessed in East Anglia, at 5% over the last 12 months. Encouragingly, the 4% difference between the highest and lowest regional increases is the smallest on record.
What you can learn from this week’s property news
We’ve always urged caution when accepting guarantors, so the news that agents and landlords are being urged to do so comes as no surprise. Even if you have a guarantor, there is always a possibility that they will be unable to pay any unpaid rent. You may find yourself taking them to court if your tenant defaults. It will still incur costs and takes time.
A much better way to proceed has always been to insist on a tenancy deposit. It could be paid by the tenant or the would-be guarantor. With the government planning to cap deposits, landlords could be left in a more precarious financial position. However, there are strategies that can be employed by agents and landlords to mitigate potential issues.
These include increasing the rent and setting some aside in an emergency fund. Certainly, if you don’t have landlord insurance which covers rental default, you should consider doing so. If you are considering accepting a guarantor, always make sure that you discuss with them their responsibilities fully. It may also be possible for the guarantor to be covered by guarantor liability insurance.
If you know the rules of the game, the potential rent deposit cap won’t be a problem for you. And if you either refuse to take guarantors or employ a suitable strategy to deal with them, then you will already be showing the caution that the current financial environment dictates you should use.
While house prices are rising, increasing consumer inflation and stagnating incomes could put a drag on house price inflation over the coming months, accentuating affordability issues in some areas. However, as building activity weakens and fewer existing homes are put on the market, continuing demand for homes is likely to support prices. We don’t expect a fall in house prices, but a rise of 2% to 5% over the next 12 months seems most likely.
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Live with passion
Brett Alegre-Wood
