Options for landlords when new regulations come into play

Written by

Robert Walton

Robert Walton is a Senior Marketing Manager with many years of experience helping brands reach the right customers through clear, informative and straight-to-the-point comms. He's all about delivering top quality customer service and shouting about the great things we do here at Novuna. In his spare time, Robert dabbles with DIY and likes to write about his home improvement tips and tricks.

Friday 26th May 2023

Huge changes are just around the corner for landlords across the UK. Both the Renter’s (Reform) Bill and the Minimum Energy Performance of Buildings Bill are being progressed, and both are set to shake up the UK rental market.

In this guide, we’re exploring what options are available for landlords looking to minimise the impact these proposed changes will have on their property portfolio.

The current state of play

Not taking into account proposed new regulations, landlords have already felt the financial pinch as a result of the cost-of-living crisis and Section 24.

  • Rising interest rates

The cost of renting out a property is undoubtedly increasing – predominantly because of high inflation. The current base rate is 4.5% in the UK, a significant increase compared to this time last year (when the official bank rate was 1%). This influences the interest rate of mortgages, making it significantly more expensive for landlords to borrow money. The more expensive mortgage repayments are, the less profit landlords make on rental income. Landlords are left with just a few choices: find a way to absorb the cost, sell up or increase rent.

  • The introduction of Section 24

Section 24 has now come into full effect. Landlords must pay tax on all rental income generated (not just profit). They will only be able to claim back financial costs such as mortgage interest and fees up to 20%. This inevitably makes the venture much less profitable for landlords with a buy-to-let mortgage, particularly those who have been pushed into a higher tax bracket due to the change.

What additional impact will the proposed changes have on landlords?

So not only do landlords have to contend with existing challenges, but there are also plenty of new regulations potentially coming soon.

It’s important to note that the proposed Bills have yet to be finalised, so it’s not too clear the impact these new rules and regulations will have on landlords just yet.

However, changes proposed in the Minimum Energy Performance of Buildings Bill include:

  • All new tenancies must have an EPC rating of at least C by 2025, with the rule applying to all privately rented properties by 2028
  • Fines for not having a valid EPC will rise from £5,000 to £30,000 in 2025
  • Investment into energy-efficient improvements will be capped at £10,000 (inclusive of VAT) from 2025 – it is currently capped at £3,500

These new changes, if approved, are likely to have a significant effect on a landlord’s income. If their property has an EPC of D or below, landlords will be legally obligated to spend up to £10,000 on improving the energy efficiency of their property. And, what’s more, they could face being fined £30,000 if the property doesn’t have a valid energy certificate.

The Renter’s (Reform) Bill also proposes significant changes for landlords, including:

  • Section 21 ‘no fault’ evictions will be abolished, with a re-worked system being developed for landlords wanting to legitimately recover properties
  • Periodic tenancies will replace six or 12-month contracts, allowing tenants to rent a property on a rolling basis with no specified end date
  • Rent increases will only be allowed once per year, and landlords must give two months’ notice. Tenants will also be given greater confidence to appeal above-market rental increases
  • There will be a new Private Rented Sector Ombudsman to help resolve disputes between landlords and tenants
  • A new Property Portal for landlords to demonstrate compliance will be introduced, helping potential tenants to make a more informed choice
  • Private rental properties must meet the Decent Homes Standard
  • Landlords will no longer be able to ‘unreasonably’ refuse pets in the property
  • Landlords may no longer be able to issue a blanket ban on individuals with children or those who receive benefits

While these proposed changes might not have a direct impact on a landlord’s income, adjusting to significant and potentially complex changes may encourage landlords to leave the market.

There may be indirect impact on a landlord’s income, though. For example, tenants will be able to provide two months’ notice when leaving a tenancy, as opposed to having a specific end date at the end of a six or 12-month contract. This could leave landlords more frequently looking for new tenants, with a potential gap in rental income while they wait for a suitable tenant to be found and letting agent costs to be factored in.

The options available to landlords

According to UHY Hacker Young, in the last twelve months alone around 70,000 buy-to-let landlords have exited the UK’s rental market. This shows no sign of slowing down, either. Further analysis by Octane Capital suggests over a third of a million landlords may quit the private rental sector as a result of new regulations.

A significant reduction in rental housing stock could impact the UK housing market as a whole, affecting not just landlords and tenants but those looking to buy or sell property too.

So it’s worth considering all options available to landlords when faced with potential new challenges.

1. Get ahead of new regulations and invest in upgrading

Landlords in the best financial situation (i.e. those without a mortgage or on a favourable fixed-rate deal) may consider continuing to rent out their properties – even if it means investing in a few upgrades.

For those with properties with an EPC of D or below, it’s time to start thinking about energy-efficient improvements sooner rather than later.

The proposed regulations are encouraging landlords to prioritise ‘fabric first’ improvements. This focuses on impactful yet potentially less drastic energy-efficient measures that improve the performance of the fabric of the building, such as including installing double or triple glazing.

While the cost of these individual improvements might not be overwhelming, finding thousands of pounds upfront can be a challenge. Particularly if your money is tied up in a property portfolio.

Taking out a personal loan to fund these home improvements could be a suitable solution. A loan gives you access to the funds you need, without you needing to deplete your savings. Simply borrow up to £35,000 and pay the money back over fixed-rate monthly instalments.

The cost of the loan repayments can be potentially offset by rental increases or – thinking long-term – increased house price should you wish to sell in the future. Energy-efficient homes are considered more desirable for buyers, so landlords may be able to recoup the cost of eco-friendly investments in the future.

2. Sell up and exit the housing market

Landlords not only have to contend with increased mortgage rates and looming energy-efficient upgrade requirements. They may also soon need to ensure compliance with a whole raft of new rules and regulations as part of the Renters (Reform) Bill.

‘Accidental’ landlords or non-portfolio landlords may choose to turn their back on the housing market altogether. After all, if it is no longer looking like a lucrative endeavour, it may seem easier to sell up and move on.

House prices are currently declining, with the Office for Budget Responsibility predicting that house prices will drop by 10% over the next couple of years. Landlords looking to make a healthy profit through the sale of their properties will likely start thinking about selling sooner rather than later, to avoid being stung by low sale prices.

Landlords must also consider the impact changes to Capital Gains Tax may have on the money gained from selling investment property. In April 2023, the current Capital Gains Tax annual exemption (which is essentially a tax-free allowance) amount dropped from £12,300 to £6,000 – and it is due to be lowered further in April 2024 to just £3,000. It may well accelerate their plan to sell up if landlords are set to pay more Capital Gains Tax.

3. Invest in houses for short-term rental use

One option many landlords are already considering is to sell older and inefficient properties and use the money to fund houses that can be used for short-term lets (where tenants occupy the property for days or weeks at a time). In fact, a survey from specialist mortgage lender Together suggests that 24% of people are considering becoming a holiday let owner.

Some of the advantages of opting to let out your property on a short-term basis include:

  • Less restrictions. Though there are, of course, short-term let rules and restrictions, they can be much less complex compared to renting out a property on a medium or long-term basis.
  • More income. Many property owners find short-term lets more profitable compared to renting, though this will be dependent on occupancy levels throughout the year and is not guaranteed.
  • Temporary tenants. Should you happen to get a bad tenant, you won’t need to worry about eviction regulations – they won’t be living in your property for long. This means there’ll be less wear and tear on the property.
  • Enjoy a holiday home when you need it. As you’ll own your own holiday let, you can take advantage of mini-breaks almost whenever you like.

Though you may be able to generate more money running a holiday let, do consider your increased outgoings too. Property owners will be responsible for all the bills, in addition to furniture, cleaning and maintenance costs. Plus, as guests demand spotless accommodation, you must ensure the property is maintained to a high standard which will incur regular renovation costs.

If you’re looking to free up some cash to help you upgrade or renovate your short-term rental property, a low APR loan could be a good way to fund the improvements. Borrow the money you need, up to £35,000, and repay the loan over two to seven years.

This allows you to spread the cost of home improvements over more manageable monthly repayments.