Buy-to-let investors with properties in expensive areas could see their incomes hit by the Government’s new welfare reforms.
Parts of outer London and the south coast will be affected by the £23,000 annual benefit cap, which the Government plans to introduce in this Parliament.
With housing prices so high, one in four private tenants in England now claim housing benefit, an increase of almost 90% in the past six years.
The Government has recently joined housing benefits and other payments together into a scheme called Universal Credit, which is being introduced in stages around the country.
This will be capped for out-of-work households in a bid to make working individuals better off. However, reducing the maximum benefit could make it difficult for some renters to pay their rent.
Founder of Landlord Action – which helps landlords with rent arrears and evictions – Paul Shamplina, reports that he has seen “a lot of landlords in London and the South East exiting the market” in the last 18 months, as benefit cuts make it harder to find tenants that can afford the rent.
“Especially in London, because rents are so high, tenants are being evicted and [moving to] places like Birmingham and Slough,” explains Shamplina. “It is only going to get tougher for landlords.”
Landlords are also facing a growing problem of tenants sub-letting rooms in their properties to benefit claimants who cannot afford their own home.
The Chief Executive of the National Landlords Association (NLA), Richard Lambert, believes that fewer landlords will let to people on benefits due to the cap.
As a consequence, Lambert is worried about “the practicalities for people who live chaotic lives”, who are becoming less able to afford private rental accommodation.
He says: “This puts the most vulnerable in society in a very difficult position.”
And the Chief Executive of housing charity Shelter, Campbell Robb, thinks that businesses could be hit, as the changes could make urban areas “no-go zones for anyone on average or below-average wages”.
He adds: “If we want to safeguard the [economic] recovery, we need to make sure that the people who keep our economy going will be able to find a genuinely affordable place to live.”
It is important to note that banks could review their buy-to-let policies if the benefit changes start to hit landlords’ cash flow.
Head of External Relations at the Council of Mortgage Lenders (CML), Sue Anderson, explains: “If benefits are reduced, then to the extent that those benefits impact on cash flow of the borrower and therefore risk to the lender, the changes could result in a greater build up of arrears.”
If you rent to benefit tenants, it is important to ensure that your landlord insurance covers rent guarantee, to avoid any lost income.