Alan Cleary - Managing Director of Precise Mortgages
Landlords have seen a lot of change over the past few years – the introduction of the Stamp Duty surcharge, the reduction in tax relief, and tougher affordability and stress-testing by lenders.
The latest UK Finance figures1 show there were 5,100 new buy to let home purchase mortgages completed in December 2018, some 5.6 per cent fewer than in the same month a year earlier. By value this was £0.7 billion of lending in the month, 12.5 per cent down year-on-year. In 2018, there were 66,400 new buy to let home purchases completed, some 11.5 per cent less than in 2017. The £9 billion of new lending in the year was 15 per cent less than in 2017.
But regardless of the new buy to let environment, the savviest landlords have adapted and survived.
It’s been interesting to see the different approaches they have taken to protect and even improve their yields over the past three years. The movement of capital out of high value areas such as London and the South East of England towards regional hubs has been well documented.
But property types, what you do with them and how you finance your portfolio has also been a strategy that many larger scale landlords have adopted. Here are the three trends we’re seeing more and more of as landlords rebalance their portfolios to maximise yields.
After the Bank of England introduced stricter stress-testing on affordability for buy to let mortgages, nearly all lenders hiked their interest coverage ratios from a standard 125 per cent at 5 per cent to 145 per cent at 5.5 per cent. After a few months, and some tentative toe-dipping, several lenders began to relax this back, particularly where landlords were paying basic rate income tax.
Precise Mortgages believes that affordability should be considered for a borrower’s holistic financial position. To that end, we brought in top slicing on buy to let remortgages, allowing customers to secure the buy to let loan size they need by using their excess disposable income to top up any rental shortfall. This has proved to be a really popular option for landlords looking to maintain properties, particularly in London and the South East where rents are already very high.
This type of flexible approach to income assessment has also helped to support the buy to let remortgage market. The UK Finance figures showed 12,400 new buy to let remortgages completed in December 2018, some 25.3 per cent more than in the same month a year earlier. By value this was £2.0 billion of lending in the month, 25 per cent more year-on-year.
In 2018, there were 169,100 new buy to let remortgages completed, some 11.2 per cent more than in 2017. The £27 billion of new lending in the year was 11.6 per cent more than in 2017.
Rather than buy a property ready-made to let – at a premium – increasingly landlords have opted to purchase sub-standard properties at a lower market value and then refurbish them to add capital value, improving yields by maximising the rental income possible.
There are various ways to finance this approach, but bridging finance has proved very popular with landlords looking to expand their portfolios. We spotted this trend around a year ago and, in the autumn, launched our Refurbishment Buy to Let proposition with selected brokers to see how it went down.
The answer is – it went down a storm. The product works by combining a short-term bridging loan that rolls up interest while the refurbishment is undertaken. When the property is ready to let and meets the expected valuation, the borrower exits on to a standard buy to let term mortgage – but the beauty of it from the borrower’s perspective (and the broker’s) is that there is no need to resubmit an application for the buy to let loan. The whole deal is underwritten at the outset. Naturally there are two procuration fees, given it is two separate loans.
We have seen a gradual shift in the profile of landlords we are lending to. There has been a noticeable exit of smaller scale amateurs from the market, freeing up properties for first-time buyers to purchase (this shows in the UK figures for 2018, which put the number of first-time buyers at its highest for 12 years). We’ve also seen larger scale landlords offload lower yielding properties in favour of reinvesting capital into larger scale options.
Houses in multiple occupation and multi-unit buy to lets have seen a real uptick in popularity following the tax changes for landlords. Not only do these more complex property types allow landlords to maximise rental incomes, they also offer greater protection for landlords from void periods.
So the buy to let market may be down, but it’s definitely not out. In fact the level of professionalism has improved the quality of deals being done, something that should be seen as a positive.
Source: 1 https://www.ukfinance.org.uk/press/press-releases/number-first-time-buyers-reaches-12-year-high-2018