Many column inches have been dedicated to buy to let of late, with some headlines predicting the end of the market.
I regard those headlines as provocative, lacking any strategic thinking and certainly not supported by basic facts.
We are all aware of the headwinds in the market in the form of: the Basel Committee on Banking Supervision consultation paper on the standardised approach for credit risk; changes to taxation for landlords; and the Financial Policy Committee’s powers of direction. Allow me to tackle them one by one.
The BCBS consultation paper potentially increases the amount of capital some lenders are required to hold for buy to let loans, therefore making them less profitable for the lender and less attractive as an asset class, despite the sector’s outstanding performance during the financial crisis. This could force prices up for consumers or see some lenders move away from buy to let. The likelihood of this proposal coming in as it stands, however, is in question. It will need a lot of consultation before being finalised. In any event, it will not come into force until 2019 at the earliest and most likely only in stages over several years. Some lenders may consider moving to the internal ratings-based approach, which will mitigate the risks entirely.
Meanwhile, changes to buy-to-let taxation begin in the 2017/18 tax year, which means the first financial impact on landlords will be in January 2019. The size of the impact for the average landlord will be additional tax of £500-£600 a year, so not a deal-breaker. It certainly does not make the average buy-to-let look like a poor investment, especially when compared to alternatives. It is likely to be completely negated by increases to rents anyway.
Those most affected by the tax changes will be owners of low-yielding properties that are highly geared. Take, for example, a £1m property at 75 per cent LTV with a rental yield of 4 per cent. The change will reduce the landlord’s profit after tax by around £6,000 a year in the 2020/21 tax year. However, this type of property is typically in London and landlords who buy there have never got rich on rental yields. Indeed, they are more likely investing for house price inflation: at 2 per cent HPI, this landlord’s property will be appreciating by £21,000 per annum in the same tax year.
Many of these landlords will utilise limited company structures to take rental income into a corporate regime, thus avoiding the tax change entirely.
Powers of intervention
The final headwind is the FPC’s potential power to intervene in the buy-to-let market if it feels it is overheating and/or proving a threat to financial stability.
The two mooted areas of control are around LTV and interest coverage ratio limits, which, taking the controls it uses in the residential market as a proxy, may mean lending above a certain LTV or ICR will be limited to around 15 per cent of new business in any one quarter.
I am encouraged by the tone from the FPC in that it does not intend to use these powers until it has seen the effects of the taxation changes.
So what about the tailwinds? Well, there continues to be a significant supply gap when it comes to UK homes. Even if government initiatives deliver the new-builds planned, this gap will remain; in fact, it is more likely to continue to increase. With this in mind, house prices should continue to rise too.
The cost of buying will remain higher than the cost of renting, due to consumers having insufficient deposits or income, and this will drive continued growth in the private rental sector.
The Government’s primary policy objective is to increase homeownership, particularly for first-time buyers. A secondary objective is to ‘cool’ parts of the housing market, particularly the buy to let sector. We do not believe it is the Government’s intention to destroy buy to let because the private rental sector is a large part of the overall market and a critical source of housing.
Like many others, I encourage policymakers to consider the second-order consequences of intervention in the housing market (such as significantly increasing rents) and to ensure decisions are based on accurate data.
Precise Mortgages, the specialist lender, has today launched an Ltd Company buy to let product which will be available from Thursday (21.01). Rates start at just 4.09% and the products are available to a £3 million loan size and up to 80% loan to value.
Highlights of the new product:
• Unlimited properties with other lenders and up to 10 to a maximum of £5m with Precise Mortgages
• Maximum age at application 80, maximum term 30 years
• Personal ownership to Limited Companies allowed with equity gifts and capital raising
• Newly formed SPVs allowed
• Near prime available
• Bridge to Limited Company available
Precise Mortgages, the specialist lender, has today entered into the government Help to Buy scheme for the first time. This range will help customers underserved by high street lenders such as people who fail credit scores due to minor adverse, self-employed, first time buyers and those with a limited credit history.
The brand new product will be available from Thursday (21.01). For almost prime customers, rates start at just 3.55%, for 2 years at 75% loan to value. For near prime customers rates start at 5.05% for a 2 year term at a 75% loan to value rate.
Highlights of the new product:
• 5% customer deposit can be supplemented by up to 5% incentives offered by builder (in addition to the scheme’s 20% contribution)
• Near prime Tier 1 and 2 criteria allowable
• 30 year term subject to age at application (max age: 70)
• Self-employed with 1 year’s accounts accepted
• Fees can be added to the loan
• Offers valid for 6 months, may extend for a further three months
• Lending on new builds with commercial ground floor considered
• Up to 20 storey blocks considered
• Revised list of acceptable new build warranty types
Precise Mortgages, the specialist lender, has today launched a brand new HMO (Houses in Multiple Occupation) product which will be available from Thursday (21.01). Rates start at just 4.24% and the products are available to landlords with at least 2 existing rental properties, for a £500,000 at 80% loan to value and £1 million loan size and up to 70% loan to value.
Highlights of the new product:
• Experienced landlords – must have held at least 2 BTL properties (single dwelling or HMO) for at least 24 months.
• Maximum age at application 80, maximum term 30 years.
• Up to 6 bedrooms allowed
• Available to £1m loan size up to 80% LTV (Max loan £500,000). (75% available through all distribution, 80% through Precise Packager panel)
• Unlimited properties with other lenders and up to 10 to a maximum of £5m with Precise Mortgages.
• Property valued as a single dwelling but multi occupancy rental income used to assess loan.
• Bridge to HMO available.
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.