It is now two months since the introduction of the government’s licensing requirements for the private rented sector. Although it is still early in the process, this article looks at the initial impact of the changes – in particular on the buy-to-let market – and what the future may hold for lenders, landlords and mortgage intermediaries.
The legislation
Although it is the introduction of Home Information Packs (HIPs) that has largely grabbed the public’s attention, the 2004 Housing Act also contained a range of measures designed to improve the quality of the private rented sector. These are:
- Mandatory local authority licensing of houses in multiple occupancy (HMOs).
- Selective local authority licensing for areas of housing where there is low demand or repeated antisocial behaviour.
- Housing Health and Safety Ratings System (HHSRS) – to ensure rental accommodation conforms to appropriate safety standards.
- Residential Property Tribunals – for resolving landlord and tenant disputes.
- Empty Dwelling Management Orders – where local authorities have powers to ‘take over’ vacant properties.
- Tenancy Deposit Schemes – which will ensure that tenants’ deposits are protected.
Licences will be granted in respect of both the property and the landlord, so anyone buying an HMO must apply for a new licence even if one has previously been granted on that property. This provision gives the local authority power to refuse a license either if the property is deemed unsuitable or the landlord is deemed ‘unfit’ (because of a criminal record, for example).
The broad definition of a property that will require licensing under the mandatory scheme is ‘a property of three or more storeys, occupied by five or more people in two or more households’. However, local authorities have discretion under the provisions to license other properties if they feel this is necessary.
The legislation only applies to England and not Wales (similar legislation will be introduced there at a later date). Scotland and Northern Ireland already have their own legislation in place.
Impact on lenders
For lenders, there are two potential impacts. First, business volumes could be affected as new investors are deterred from coming into the market and existing investors exit the market to avoid costs associated with licensing their properties. Second, lenders must ensure that their lending policies and criteria take account of the new legislation – in order to ensure, for example, that they are not left in possession of unlicensed properties.
In terms of business volumes, we do not believe licensing will have a big impact. When it comes to policy, some lenders – regrettably – have chosen simply to cease lending on HMOs in order to avoid any problems. Others, like Mortgage Express, have looked in more detail at their policy to try and accommodate the new requirements.
Although Mortgage Express has not traditionally done a lot of business in the HMO sector, like many buy-to-let lenders, we lend on student properties and various other professional shared lets that will be caught under the legislation. Our objective in tackling the new legislation was to avoid excluding properties we previously lent on while ensuring we included any new definitions in policy.
We will lend on most tenancy types, and we have maintained our existing property criteria – for example, allowing only one kitchen and requiring all tenants to be under one Assured Short-hold Tenancy agreement. We have also incorporated new requirements which must be satisfied to obtain a license – for example where a property has more than five tenants, there must be a second WC/bathroom.
In addition, we have put procedures in place to ensure we are able to identify existing and new properties which will be subject to the new licensing.
Although we have tried to take a positive approach to the legislation, we know that risks remain for lenders. There is still some uncertainty around the roles and responsibilities of a lender in possession, and the impact of ‘management orders’ that local authorities can impose on properties which the landlord has not brought up to a licensable standard. The license application process itself holds some risk, because a landlord cannot apply for a license until they own the property. So a lender is committed to providing funds before they know whether a license will be granted on a particular property. Obviously, the valuation process provides some guidance here, and a lending decision must take account of the view that a property may not in fact meet the licensing requirements.
Existing landlords
For existing HMO landlords in the buy-to-let market – including those who let to students – the impact of the changes will vary. For some, the impact will be nothing more than the administrative application process. For others, the changes will take their toll financially – not simply in terms of the time and cost involved in making a license application, but more substantially because of the cash investment it may take to bring properties up to a licensable standard. Some landlord organisations have been critical of certain requirements contained in the legislation, and there is no doubt that some provisions of the HHSRS could prove to be costly (for example, cavity wall insulation).
Despite this, research indicates that buy-to-let landlords on the whole are not planning to leave the market. Before the introduction of the legislation, the National Landlords Association (NLA) found that a majority of its landlords believed their properties would meet the licensing requirements and that they were not looking to sell. More recently, the Mortgage Express Buy-to-Let Confidence Study revealed that although awareness of the licensing requirements was reasonably high among landlords (around 50 per cent), there was still only a very small proportion (4 per cent) looking to exit the market.
New landlords
New landlords have continued to enter the market –though the NLA research did suggest that licensing would (understandably) make landlords generally less likely to purchase an HMO. This does not, of course, mean that they will stop investing in this kind of property completely. In particular, professional landlords trading in the HMO sector will be likely to have a good understanding of the licensing requirements in a particular area and will make a commercial decision on the costs and benefits of buying a particular type of property.
Landlords and introducers
Although licensing is primarily a matter between the landlord and the local authority, there is no doubt that brokers – and lenders – in the buy-to-let sector should be aware of licensing in order to provide the best possible service to landlord clients.
As a lender, we try to ensure all our customers are aware of HMO licensing. Unfortunately, although many local authorities are still finalising their approach, it is already apparent that councils will be applying different requirements and charging different fees for granting a license. While this is understandable when you consider the diversity of housing stock within different local authority areas, it makes a landlord’s job more difficult – particularly where they have portfolios spanning a number of areas.
I would advise that introducers make themselves aware of licensing requirements in their own areas so they have an idea about which properties are likely to need a license. In particular, for new clients buying local property, it may be appropriate to have a contact name in the local authority whom they can contact for advice on the application process. In addition, bodies such as the NLA can provide advice and guidance for landlords on licensing as well as other issues concerning rented property.
Short-term impacts
Licensing of HMOs was introduced in April and is part of a package of measures designed to improve the quality of the private rented sector. While it is too early to say whether this long-term goal will be achieved, some short-term impacts are in evidence. Some lenders have stopped lending on HMOs, although many more are still active and have adjusted criteria in line with the legislation. Some landlords may face significant costs to bring their properties up to licensable standards, but a majority have expressed confidence about their properties and there is no evidence yet to support fears of a flight from the market.
Lenders and mortgage intermediaries must play a key role in creating awareness for buy-to-let landlord clients as far as possible about the new requirements being introduced. Clients looking at buy-to-let should be made aware of the new licensing provisions and the possible impact they may have on the property purchase. Clients can obtain full details of the provisions applying in an area from the appropriate local authority and detailed advice is available from organisations such as the NLA.
