How will the proposed ban on letting agent fees impact on buy-to-let landlords?

It is now more than six months since the Autumn Statement, where the Chancellor laid out plans for another controversial regulation change set to impact on the buy-to-let sector.

During the Statement, Mr Hammond announced that the Government was to ban letting agent fees paid by for by tenants.  Presently, these fees are required to cover costs of imperative administration tasks, such as credit and reference checks.

A consultation on this move was launched on April 7th, which will run until today (June 2^nd).

Reaction to the proposals from within the sector has been mixed at best, with a number of key industry peers set against the move.

Taking this into account, just why has the Government decided to put forward the legislation? How could such a change impact on the rental market? Who could be most impacted on?

Ryan Weston, of Just Landlords Insurance Services, investigates:

Why has the proposed ban been put forwards?

“Chancellor Phillip Hammond announced the ban on letting agent fees to give both a fairer deal for millions of tenants, but also to raise competition within the private rental sector.

The Government wants to get rid of hidden charges that are currently hitting tenants in the pocket, while eliminating rogue letting agents charging extortionate fees at the same time.

Together with raising standards in the housing market, Mr Hammond feels that the ban on agent fees will help 4.3million households in England, by preventing them from paying any fees upfront. These costs average out at roughly £337 per household, according to research from Citizen’s Advice.

How will the proposal impact upon the rental market?

On first glance, many tenants will be more well-off as a result of reduced outgoings and a better sector. This said, many industry peers have moved to voice their concerns.

It is feared that these fees once paid by tenants will be instead absorbed by buy-to-let landlords- leaving many with little option but to pass them back onto tenants in the form of increased rents.

A number of landlords and industry bodies are unhappy at another legislation change impacting on the buy-to-let sector coming soon after other major alterations. These include amendments to mortgage interest tax relief, the full rollout of the Right-to-Rent scheme and the 3% rise in Stamp Duty surcharge for buy-to-let and second homes.

Chief Executive of the National Landlords Association, Richard Lambert has been one to air his concerns, saying he feels that while the Chancellor is, ‘clearly aware of the pressures facing those living in the private rental sector,’ he, ‘lacks an understanding of how the whole sector works.’

Mr Lambert went on to say ‘Agents will have no other option than to shift the fees on to landlords, which many will argue is more appropriate, since the landlord employs the agent. But adding to landlords’ costs, on top of restricting their ability to deduct their business costs from their taxable income, will only push more towards increasing rents.’

What about the public’s reaction?

Despite the perceived negativity from leading peers of the industry, the wider public have actually pledged their backing to the proposed ban.

A recent survey from Citizen’s Advice showed that 46% of UK residents feel tenants should not be made to pay admin charges -apart from their deposit and monthly rent – when obtaining a property through a letting agent.

This figure rose to 61% when renting directly from a buy-to-let investor.  The same percentage of respondents believe that tenants should not pay more than £50 to secure a rental property. Unsurprisingly, this figure rose to 74% when assessing results ascertained from private renters.

Nick Marr, co-founder of The House Shop, comments: ‘There is little public support for the current system. Many tenants are prepared to pay a small fee for legitimate expenses involved in securing a property, such as a professional reference check but vague and undefined admin charges that can total hundreds of pounds are tough to defend in the current market.’

Will the impact really be so severe?

It is understandable that a large number of landlords are undoubtedly going to be worried about the impact that the ban of letting agent fees paid for by tenants could have on their overall income.

Typically, it is estimated that letting agents charge buy-to-let landlords an average of 10-15% of their income to pay for their management services.

‘Some landlords will undoubtedly raise their rents as a result of the ban – as we have seen in Scotland – but many will be able to absorb the costs of this new system without substantial losses, meaning tenants should not face a barrage of rent rises once the ban is in place’, Marr observes.’

What does the ban mean for letting agents?

Whilst it would be inaccurate to forecast that all letting agents will not be affected by the proposals, research seems to suggest that the long-term forecast looks to be stable.

A report from the UK Association of Letting Agents (UKALA) suggests that just 9% of landlords plan to leave their letting agent if their premiums were to rise.

This prediction comes despite the fact that 79% of landlords believe that their agent will increase their costs should the ban on fees come into force.

Richard Price, the executive director of UKALA, seems to sums the situation for letting agents up perfectly by noting there is a, ‘tricky path ahead to navigate for agents as they’ll need to balance out the need to cover their costs in the wake of a ban on tenant fees without alienating their primary customers and source of income.”

… LandlordZONE.

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