Last year was a great year for the mortgage market in many respects and was incredibly busy for those in the intermediary sector. 2016 looks set to be another exciting but challenging year with a convergence of regulation and tax changes all set to impact in the first few months. We all have known for quite some time that MCD will be arriving in March and lenders and intermediaries have been preparing for this change, but what will the impacts be? That is the tricky question but here is my view: First charges relatively unaffected but some market confusion caused because some lenders will use KFI+ and others ESIS, no doubt sourcing systems will have issues dealing with the duplicity. Changes to a binding offer not likely to present any problems for lenders or intermediaries and CBTL should be pretty straightforward, although intermediaries operating in this space will need FCA authorisation to do so. The big impact will be in second charges where there will be a sea change. All lenders will be issuing ESIS but we will see changes in product design making second charge products look very similar to a first, so for example I expect to see residential seconds with ERCs, free valuations and maybe even cashbacks. The processing of second charges will align with firsts and some networks and clubs are likely to strike deals with lenders to go direct. Packagers will enter the residential space and compete with master brokers for business but the majority of consumers still likely to buy via comparison websites. Affordability changes on second charge loans likely to make the market contract until we eventually see a rate rise which will drive consumer behaviour and reinvigorate the second charge market. The BTL market will have a very interesting year as FPC powers come into force and from 1st April a raft of taxation changes will be phased in.
Tax year 2016/17
Effective 1st April, an additional 3% loading to Stamp Duty and Land Tax rates for BTL and second property transactions.
For furnished properties, Wear & Tear Allowance will be abolished, and landlords will only be able to claim actual expenditure on new or replacement items.
It is expected that the FPC will be granted Powers of Direction over the BTL mortgage market in the same way as it has over residential mortgages. It is not known whether these powers will be utilised but could include LTI caps and/or interest rate stress tests.
Tax year 2017/18
25% of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket the landlord falls into (either at Basic Rate – 20%, Higher Rate – 40% or Additional Rate – 45%).
A deduction of 20% of the interest that has been disallowed will be taken from the tax payable.
Tax year 2018/19
50% of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket the landlord falls into. A deduction of 20% of the interest that has been disallowed will be taken from the tax payable.
Tax year 2019/20
75% of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket the landlord falls into. A deduction of 20% of the interest that has been disallowed will be taken from the tax payable.
Tax year 2020/21
100% of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket the landlord falls into (either at Basic Rate – 20%, Higher Rate – 40% or Additional Rate – 45%). A deduction of 20% of the interest that has been disallowed will be taken from the tax payable.
In addition from April 2019, a payment on account of any CGT due on the disposal of residential property will be required to be made within 30 days of the completion of the disposal. This will not affect gains on properties which are not liable for CGT due to Private Residence Relief. The government will publish draft legislation for consultation in 2016. Currently the payment window is up to 21 months.
There will inevitably be some softening in the BTL market but the headlines predicting the death of BTL is miles wide of the mark. Impacts to basic rate tax payers are minimal with impacts to higher rate and additional rate tax payers being moderate and completely manageable with relatively small increases in rents phased in over the next five years.
Low yielding high value properties will see the biggest impact but arguably the people who invest in this type of property can afford some negative cash flow provided the property is enjoying reasonable levels of HPI.
Simon Carr, Sales Development Director
Have you ever wondered how the supply and demand of crude oil can have such a fundamental effect on the global economy, as well as on the currency of individual countries?
Crude oil (aka black gold) is distributed through pipelines spanning entire continents. Those pipelines, whilst robust in construction are often adversely affected by external sources. For those countries experiencing these adverse effects you could argue that they should have been prepared for fluctuations in their pipelines when you take into consideration they were aware of the outside influences weeks, or potentially even months ago.
To me it seems that the second charge market faces very similar questions. As we draw closer to 21st March 2016, the focus on managing pipeline from the Consumer Credit Act to the Financial Conduct Authority and the world of regulated mortgage contracts becomes far more interesting. Changes to the regulated regime mean that outside influences such as new affordability calculations and stress testing both first and second charges means that the pipeline is in danger.
You guessed it - currency, price or income could be adversely affected and your firm’s income/currency could be hit hard.
Plans have to be implemented immediately to mitigate the risk of customers not being able to arrange the second charge loan they wanted. For some, deals that have not completed by 21st March 2016 will have to go through and endure kick-starting the process again. Information will have to be entered onto lenders’ new systems once again, and the decision will be reliant on newly introduced affordability and stress testing criteria – let’s call these outside influences.
My point is, you don’t have a crystal ball and can only estimate the effect of these new changes to your pipeline. Whatever happens, as you get closer to turning one tap off and one tap on, your pipeline and currency is at risk.
So to be crude – lender selection to help meet your client’s circumstances has never been more important than during the next couple of weeks. Selecting a lender who already operates a robust affordability model, who already stress tests the first and second charge by the recommended 3% will ensure that what fit today’s criteria will also fit tomorrow’s. Let me put it another way - your pipeline will run at 100% capacity.
For some time I’ve been asked how we intend to help manage pipeline... I’ll share a secret with you here - when we launched our second charge loan proposition in 2013, it already complied with the future regime. How did we do this? We applied the same rules to second charges that we applied to our existing first mortgage lending proposition.
Let me make it clear that we haven’t been forced by regulation to change – we adopted the correct approach from Day One and with a number of master brokers already benefiting by safeguarding their pipeline. You can safely place a deal and, crudely put, your pipeline is safe and will not be affected. This has to make sense, right? Unless of course you’re not particularly risk averse, which is safe to say is dangerous in a regulated environment, don’t you think?
Listen to my wise words - protect your pipeline, you’ve worked hard to get it where it is.
Don’t mess it up!
Keep the changes in perspective: most buy-to-let lending is refinancing, and stamp duty is levied only on purchases
It seems that not a month goes by without Chancellor George Osborne making a surprise announcement on the subject of buy-to-let landlords.
The latest proposal regarding an increase to the stamp duty land tax payable on an investment property or second home comes on top of the changes to mortgage interest relief for higher-rate taxpayers announced in the Summer Budget.
We are also yet to see what the Bank of England’s Financial Policy Committee will do once its powers of direction in the buy-to-let market have been ratified.
I can imagine that the people who rely on the buy-to-let market to make a living are becoming seriously worried. And, to be frank, there are a lot of people who do rely on it.
But while I am concerned about the cumulative effects of intervention, we need to put things into perspective. Many people talk about the growth in buy-to-let gross mortgage lending but the majority of it (around 60 per cent) is refinancing of existing mortgages. These transactions will be less affected by the changes because stamp duty land tax is levied only on purchases.
Also, landlords who refinance tend to have benefited from house price inflation over a number of years, so they often require much lower LTVs than those purchasing.
Fifteen per cent of the total stock of mortgages in the UK is buy-to-let, which will still need to be refinanced, especially as the base rate starts to rise.
Purchases, on the other hand, will take the full brunt of the changes and there is no doubt that this will make some would-be landlords think twice. However, I do not regard this as a bad thing. As I have written in this column before, when the conversation at dinner parties is dominated by people talking about their property portfolios, you know it is time to worry. The average landlord that we lend to has multiple properties and is in it for the long term.
While they will not be delighted by the changes, they will benefit from fewer speculative landlords in the game.
In my opinion, the Bank of England Stability Report is completely rational and makes perfect sense. I also take comfort in the fact that the FPC will wait to see what the cumulative effects of the taxation changes are before it takes action.
So while I think there may be some softening of the buy-to-let mortgage market next year, and a shift towards more professional landlords, I certainly do not envisage a massive drop-off.
With the underlying demand for rental property being so strong, any softening is not going to last for long.
Monday 21st December 2015 – 9am - 6pm
Tuesday 22nd December 2015 – 9am - 6pm
Wednesday 23rd December 2015 – 9am - 6pm
Thursday 24th December 2015 – 9am - 1pm
Friday 25th December 2015 – Closed
Saturday 26th December 2015 – Closed
Monday 28th December 2015 – Closed
Tuesday 29th December 2015 – 9am - 6pm
Wednesday 30th December 2015 – 9am - 6pm
Thursday 31st January 2016 – 9am - 5pm
Friday 1st January 2016 – Closed
Simon Carr, Sales Development Director
Well, I've started the MCD road trip. Visiting a number of second charge master brokers to discuss our proposition and how the world will change. (For those who haven't seen me, don't worry I'll be in touch real soon).
In planning my road trip, I've considered the changes afoot and how I should develop an effective communication strategy for the wider market. I have to say, for second charges, many of the hot topics such as stress testing first and second charges, developing a robust affordability model and allowing the consumer the option to pay for telegraphic transfers or the product fees - up front, from the loan or adding those fees to the loan - have been in place from when we first launched.
We've made a couple of changes to the online sourcing system - we haven't had to rebuild anything and the good news is that a move is on the horizon. This will see second charge loans become fully regulated - in the exact same way as a mortgage. What does this mean? We will be producing the mortgage illustration and mortgage offer via the system - yes that's right - manually producing documents is a thing of the past.
A crazy thing called XML (which stands for Extensible Markup Language – technical hey) means that your sourcing systems will do all the hard work for you. You get a decision in seconds and submitting an application to us allows the production of the documents I mentioned earlier - just like child’s play (see what I did there - refer to Precise Mortgages’ latest advertising campaign).
The Mortgage Illustration requires us to name the credit intermediary responsible for the sale - including email, telephone number and web site. The rest of the information forms part of the normal process we have always followed.
I'm desperately searching for the big news scoop, the big thing to announce to the market. I'm afraid, no scrap that, I'm delighted to say it's business as usual. Oh hang on, here it is...you'll experience a smooth, slick, efficient process which complements and supports your evolving sales process.
We've improved the speed to ‘yes’ and our market leading products will help you convert more business with us, not less.
The beat of the regulatory drum gets louder for second charges. I'm convinced that as a specialist lender of choice - Precise Mortgages and its comprehensive range of first charge and second charge residential and buy to let products along with our bridging loans - will be a number one consideration for any mortgage intermediary.