Alan Cleary, Managing Director of Precise Mortgages
Summer is normally pretty quiet for the mortgage market.
The school holidays prompt parents to take the kids away for some much-needed time off. Parliament and the press enter silly season, worrying more about who’s been voted off Love Island than what to do with taxes. Most people who might think about moving later in the year are too busy enjoying the sunshine and barbecues in their own back gardens to indulge in speculative house hunting.
There are parts of the market that are suffering as a result. Property transactions are down across the board. The latest HMRC stats show residential transactions fell 9.6% between May and June, representing a 16.5% drop compared with June last year. Non-residential transactions also fell by 7.2% month-on-month and 12.4% year-on-year.
And yet, there’s always a flipside to every story, and lower transactions in the residential market doesn’t preclude the fact that a lot of families need to move home — the need to scale up because of growing families or to move to take up a new job remains. It’s perhaps not a surprise then that demand for rented accommodation remains resilient, especially given its flexibility in a time of uncertainty. We’ve noticed strength in the London market, particularly since the available stock to rent there has fallen over the past few years following widespread portfolio rebalancing in the wake of tax and regulatory changes for landlords.
The introduction of top slicing to our portfolio affordability assessment model for landlords remortgaging buy-to-lets or expanding their portfolios has proven popular, especially in the capital and its surrounding commuter areas.
The knock-on effect of the jams in the residential market doesn’t stop with buy-to-let. Those operating in the short-term market have been aware for some time that landlords who know what they’re doing longer term have been looking to add value to properties upfront, often using bridging to finance refurbishments before refinancing to a term buy-to-let.
We’re seeing a lot of this type of business, where in the past traditional regulated bridging loans made up a larger part of our day-to-day.
This is telling in itself: we see our role as a specialist lender as one of spotting underserved niches in the mortgage market — across residential, buy-to-let and bridging — and designing funding solutions that meet borrowers’ needs.
That we’ve seen such strong demand for short-term finance to pre-fund buy-to-let purchases reveals there is persistent demand for finance from landlords, despite the increasing tax burden they’re bearing.
It also confirms that life goes on in spite of political uncertainty at home and abroad.
Alan Cleary, Managing Director of Precise Mortgages
It’s usually only with the benefit of hindsight that you can make sense of things and see them for what they truly were. However, you’re sometimes given a warning about an iceberg just over the horizon and have plenty of time to change your course to avert disaster.
Take the situation facing ‘Generation Rent’ for example – those currently living in rented accommodation who believe they have little chance of becoming actual homeowners themselves because of high housing prices.
The recent Rental Housing for an Aging Population report from the government’s All-Party Parliamentary Group for Housing and Care for Older People throws the future dilemma facing this demographic into sharp relief.
According to the report, 22% of those aged over 65 are currently either private or social tenants, but this figure is predicted to dramatically increase in the coming years as owner-occupier numbers fall and the private rented sector continues to grow.
With people’s incomes typically halving after retirement, those in the private rented sector who currently pay 40% of their earnings in rent could have to spend up to 80% of their income on rent in retirement. This will particularly affect the millennial generation – that is those born between the early 1980s and the mid-1990s/early 2000s – with the report suggesting that around 630,000 millennials could face problems as they are unable to afford to buy homes and their pension income will not be sufficient to cover rental costs.
The report concludes that to meet the future challenges, the government will need an extra 38,000 homes a year for rent, totalling 1.1 million additional rental homes by 2050.
So, what can we do to avoid the ‘inevitable catastrophe’ the report claims will affect the pensioners of tomorrow? Well, as lenders, we can all play an important role in making sure we’re offering the products and criteria to help customers buy their own property, whether they’re a first time buyer, self-employed, want to take advantage of the Help to Buy scheme or have a less than perfect credit history.
Here at Precise Mortgages, we’ve thought long and hard about how we can make our residential mortgages as widely available as possible. We now accept applications from applicants aged between 21 and 70 (75 on referral) with a maximum term of 35 years, and our products are tiered to meet individual credit profiles, including those with CCJs, defaults, DMPs and missed payments. Customers can choose from a range of different repayment methods, including capital and interest, interest only and part and part, and we’ll calculate affordability based on the repayment method selected up to 85% LTV.
With more people working for themselves than ever before, we consider one year’s figures (SA302 plus tax year overview or HMRC tax calculation plus tax year overview), and zero hours contracts on secondary applicants. We’ve also beefed up our Help to Buy offering by making it available to customers north of the border in Scotland for the first time and now offer remortgages to help early adopters of the scheme make the transition to become more established homeowners.
With such a stark warning about the future, it’s vital that we help younger generations realise that buying a home can be a reality, not just a distant pipedream.
New research* from Precise Mortgages, the UK’s leading specialist lender**, shows more than half of landlords plan to use limited companies to buy properties in the year ahead underlining the ongoing transformation of the buy to let market.
Its study found 55% of landlords will use limited companies for purchases which is more than double the 24% of landlords who intend to buy as an individual.
The latest research confirms the continuing rapid growth in the number of landlords using limited companies to expand their portfolio – in Q4 of 2018 around 44% of landlords planned to use limited companies for purchases and in Q1 of 2019 the number was 53%.
Limited companies are most popular among landlords with a portfolio of 11 or more properties with 71% using them for purchases but it’s still the dominant option for those with portfolios of 10 or fewer with 51% saying they will go down the limited company route to buy their next property compared with only 27% buying as individuals.
Nearly seven in ten (69%) of landlords intend to fund their next portfolio purchase with a traditional BTL mortgage compared with just over six in ten (62%) in Q4 2018, the research shows.
Limited company status is more attractive to landlords as the phased reduction in mortgage interest tax relief does not affect them and they can offset mortgage interest against profits which are subject to Corporation Tax of 19% instead of income tax rates. Interest coverage ratios on limited company applications are also lower than for most individual landlord applications.
Alan Cleary, Managing Director of Precise Mortgages, said: “Despite the challenges in the market, professional landlords have still managed to grow their portfolios over the past year with the use of limited companies, and it will continue to be the most preferred purchase route particularly for those with larger portfolios.
“The increased use of limited company status is further evidence of how the buy-to-let market is changing and demonstrates how brokers and their clients need expert specialist support when buying as a limited company or considering switching.”
Precise Mortgages has a specialist limited company buy to let intermediary support team available at [email protected]. Full details of its range of products for both individual and limited company landlords, including their latest Limited Edition range are available at www.precisemortgages.co.uk/buytolet.
* BDRC Q2 2019 Landlords Panel syndicated research report prepared for Precise Mortgages. Fieldwork was conducted online between 7th and 24th June 2019 among a sample of 738 National Landlords Association members
** BVA BDRC Project Mercury Report Q1 2019
Alan Cleary - Managing Director of Precise Mortgages
The number of people remortgaging has surged in recent months. After hitting a near decade-high at the end of 2018, the trend has continued in 2019. Research by conveyancer LMS found there were 52,560 remortgages in April, with borrowers taking out an average amount of £168,600.
What is the reason for so many people choosing to remortgage? An unprecedented long period of low interest rates, the economic uncertainty caused by Brexit and fierce competition between lenders have all contributed to creating a perfect storm which has resulted in many homeowners deciding to batten down the hatches. With new loans to both movers and first-time buyers remaining sluggish, more people are opting to stay put, often adding value to their existing property by carrying out improvement work.
Taking advantage
There has been real growth in the popularity of longer-term fixed-rate deals as homeowners take advantage of the low interest rates. In a world where the price of everything is going up, there is peace of mind in long-term payment security and knowing that your mortgage payment is the one outgoing that you’ve got some control over.
This is again borne out in LMS’s research, which found that 97 per cent of those remortgaging chose a fixed rate product in April 2019. Not surprisingly, five-year fixed rates were the most popular option, making up 48 per cent of purchases, followed by two-year fixed rates at 34 per cent. Nearly 50 per cent of borrowers also chose to increase their loan size.
Interestingly, the research also found that 65 per cent of borrowers decided to remortgage using the expertise of a broker, a near three-fold increase on the 22 per cent who used a broker to remortgage back in September 2016.
What this highlights is the importance of advice in the remortgage process and the vital role brokers have to play in helping customers refinance their properties. It means there is a big opportunity for brokers to reacquaint themselves with previous customers who are approaching the end of their term and those who have already lapsed onto their lender’s reversion rate. Lenders also have an important role to play by making sure they are designing a range of products to meet customer demand.
With so many people looking to remortgage, it is vital brokers and lenders work together to ensure customers can access products that help them save money and release cash they have built up in equity in their property. Brokers should make sure lenders know all of their customer’s information from the very start of an application to ensure the case can be completed quickly and efficiently.
At Precise Mortgages, we allow customers to remortgage on both our core buy-to-let and residential mortgages. We are also one of the first lenders to offer Help to Buy remortgages with zero product fees, refund of valuation and cashback to help customers make the transition from first-time buyers to established homeowners.
So whether your customer wants to unlock equity in their property, is nearing the end of their term, wants to escape from their lender’s reversion rate or simply wants to move to a cheaper product, it is up to all of us to ensure that we offer customers options and choice.
Alan Cleary - Managing Director of Precise Mortgages
Last month the Tenant Fees Act came into force, preventing letting agents from charging tenants disproportionately high referencing and contract fees. At the same time, rental deposits were capped to five weeks.
As a move to protect tenants from being charged unfair and sometimes astronomical fees, it’s one that we at Precise Mortgages welcome.
We strongly support a private rented sector that treats tenants fairly, just as we want to see one that enables an environment allowing professional landlords to offer quality accommodation to those tenants and still turn a profit.
There have been plenty of warnings that the loss of this fee income would prompt letting agents to raise landlords’ costs to compensate, piling yet more pressure on them at a time when their finances are already undergoing massive change.
It’s something that has seemed the inevitable, if unintended, consequence of legislation designed to protect tenants.
Rents increasing
So it would seem to have turned out.
The private rented sector report from ARLA Propertymark showed the number of tenants experiencing rent rises increased to the highest figure they’ve ever recorded, at 45 per cent in May 2019. Year-on-year, this figure is up from 27 per cent in May 2017, and 28 per cent in May 2018.
It seems reasonable to draw the conclusion that landlords, faced with rising costs on yet another front, have done the only thing they can to manage – raised their own prices in response.
There are other factors at play here, though.
The same report from ARLA also showed the number of properties available to rent dropped marginally to 201 per member branch in May, from 202 in April.
Meanwhile, demand from prospective tenants increased in May, with the number of house hunters registered per branch rising to 69 on average, compared to 64 in April.
Year-on-year, demand is up 15 per cent, from 60 house hunters registered per branch in May 2018.
Restricted supply combined with growing demand for rented accommodation is supporting these rent rises; they are not simply a function of passing on letting agent fees back to renters on a monthly basis, easy as that explanation will no doubt seem to many.
Fundamental restructuring
There is a much more fundamental restructuring going on in the private rented sector – one that began with the stamp duty surcharge and continues today as landlords’ profits feel the pinch of reducing tax relief on mortgage interest.
There has also been the simultaneous tightening of prudential rules by the Bank of England, with tougher affordability stress tests and the portfolio rules taking years to bed in as landlords come to remortgage.
It’s not been an easy ride for landlords over the past few years, and it’s taken considerable time to adjust. Yet we are seeing that they are adjusting.
Our own buy to let lending remains strong – something that we attribute to the fact landlords committed to remaining in the market are working out smarter and more efficient ways to finance their investments.
We’ve tried to support that too, by identifying where in the market we saw ‘problem’ gaps appearing.
London’s fundamentals are not bad
London’s market was the obvious one: high house prices and proportionately lower rental incomes made yields too skinny to stand up to the tougher affordability scrutiny lenders were having to apply to new purchases and those made by portfolio landlords.
But the fundamentals of the London rental market are not bad – quite the contrary. It’s often the way with rules designed to create systemic stability; it makes sense overall, but there are going to be examples of good deals that don’t fit the new box.
Ironically, putting this kind of pressure on London’s rental market probably wasn’t the intended outcome.
Demand for flexible and high-quality accommodation in the capital is consistent and strong; capital values are typically resilient, particularly over the long-term, which is usually how landlords invest.
We recently launched portfolio top slicing, which allows landlords to use their surplus portfolio or earned disposable income to prove they can meet any financial stresses on a new loan application.
So long as the landlord’s overall interest cover ratio meets the minimum requirements there is scope to include very low yielding properties in a portfolio so long as they are balanced by higher yielding properties elsewhere.
This move puts London and other high value markets back in the game; something that tenants will no doubt appreciate at a time when supply is under pressure and rents are rising.
