Alan Cleary - Group Managing Director
The start of the year often brings a flurry of predictions and surveys reviewing the year just gone. This year a couple of stories caught my attention.
The first was based on data published by the Ministry of Housing, Communities and Local Government revealing that new-build starts in England were down 11% in Q3 2019, compared with the previous year. The first nine months of 2019 saw builders start 157,550 new homes, a 7% fall on the same period a year earlier.
Meanwhile, completions are still rising — over the same period, the number of new homes delivered to market was up 9% on the previous year.
These statistics are important because they give us a glimpse of how the housing market is going to look in the next year or so.
At the moment, the number of new homes coming to market is relatively high (though not high enough according to most) and the housing market is in pretty good health. Prices are generally supported by consistent demand from buyers using traditional mortgage finance and making the most of the Help to Buy scheme.
But while completions are healthy, this fall in starts reflects just how jittery things got in the economy over the past 12 months of wrangling over our political future.
Developers clearly reined in investment during a period when there was a real fear that the UK could suffer a major economic shock following a hard Brexit. The effect that would have had on demand for mortgage finance — and, crucially, borrowers’ affordability — would have been profound.
Turning off the taps momentarily was a sensible decision in the interests of shareholder protection, but the effects of that tightening in supply will have consequences that are felt for years to come. There is also a question of whether Q3 2019 was a blip or a reversal in trend.
Whatever the answer, the figures caught my attention because demand for housing remains intense. And fewer new builds coming to market leaves space for conversion from existing stock to pick up at least some of the slack.
This is an opportunity for the bridging market, which funds large numbers of refurbishment and permitted developments, returning stock to both the residential purchase market and the private rented sector.
Another thing to have caught my eye was data which showed that the average rates charged on two- and five-year fixed buy-to-let mortgages had fallen by more than a quarter of a per cent year-on-year, according to Moneyfacts. Landlord optimism to invest in buy-to-let or a desire for cheaper deals in 2020 may have led providers to cut rates to entice prospective borrowers.
We’re almost four years into a shift in behaviour from landlords driven by the tax changes announced in 2015 by George Osborne.
Landlords who couldn’t stomach the change in regime, and the effect it had on their financials, are now pretty much out of the market. Those who remain are well into the restructure of their portfolios to protect profitability.
This restructuring has underpinned activity in buy-to-let and there is plenty still to do over the coming years. This bodes well for brokers introducing this business, but it’s also likely to have a knock-on effect on the bridging sector.
While some of this restructuring is down to straightforward remortgaging and reallocation of capital within an existing portfolio, sale and reinvestment into alternative, higher-yielding properties is a trend that we expect to ramp up this year. This provides an excellent opportunity for those in the bridging sector to fund projects that precede the buy-to-let finance requirement, adding capital value and improving rental income potential for landlords in search of just that.
Alan Cleary - Group Managing Director
It’s just over a month to go now until new energy efficiency rules come into force which could result in hundreds of thousands of landlords being hit with a fine of up to £5,000 if they fail to meet them.
According to a recent article in The Telegraph, switching service Switchcraft has looked at more than 18 million energy performance certificates and found that more than a quarter of a million landlords are yet to carry out vital improvement works needed to bring their properties up to the required standards.
In case you didn’t know, from 1st April landlords have to ensure that existing tenants are living in properties that meet minimum energy efficiency standards (MEES). This is the latest phase of the MEES roll-out and is the first time the standards have been extended to existing tenants, having been previously introduced for new lets and tenancy renewals back in 2018.
From April, properties with an energy performance certificate rating of F or G – the lowest possible ratings – will be considered unrentable. Any landlord found not to be complying with the new rules could face a fine, with the amount dependant on the type of infringement and the length of non-compliance, as well as being named and shamed by appearing in the local authority’s PRS Exemptions Register.
It’s all part of a wider drive to improve energy efficiency standards and help the UK to achieve its carbon reduction targets.
It started in 2007 with the introduction of the Energy Performance Certificate (EPC) rating system. Now, whenever a property in the UK is constructed, sold or rented out, it has to have a certificate to show how much energy it uses and how it rates in terms of energy efficiency based on factors such as insulation, heating and hot water systems. Properties are given a rating from A (most efficient) to G (least efficient) and all rented buildings must have an up-to-date EPC which must be made available free of charge to any prospective tenants at the earliest opportunity.
Then, in April 2018, the MEES for residential and commercially let properties in England and Wales were introduced. The MEES have been rolled out in phases – new lets and tenancy renewals to begin with, then existing tenancies from this April, then all tenanted commercial buildings from April 2023.
There are some exemptions, listed buildings and holiday lets that are rented out for less than four months a year for example, but the majority of landlords now need an EPC for their property.
Don’t get me wrong. Anything which improves the conditions for tenants living in rented accommodation, not to mention helps the environment, is laudable. However, with the 1st April deadline fast approaching, I’m concerned there appears to be so many landlords who are still unaware of the changes.
It means there’s a good excuse for brokers to get in touch with existing and previous customers to make sure they’re prepared and encourage them to check their property meets the minimum standards.
And with costs for improvement works capped at £3,500 for landlords funding the work themselves, it’s an opportunity to find out if they need help in securing finance to make any required upgrades, such as fitting double glazing or installing a new boiler.
This is why brokers are so valuable to their customers – not just as someone who can make them aware of potential problems, but as someone who can offer them solutions to those problems.
Alan Cleary - Group Managing Director
It seems there hasn’t been a year go by recently when landlords haven’t been left reeling by some new piece of legislation.
Since 2015, we’ve seen the introduction of the Stamp Duty surcharge, the phased reduction of mortgage interest tax relief and more stringent affordability checks coming into force. And that’s just for starters. There’s also been changes to HMO licensing, the launch of the Tenants Fees Act, the introduction of Minimum Energy Efficiency Standards and the proposed abolition of Section 21.
Now don’t get me wrong. I’m all in support of anything which improves things for tenants, drives up standards and gets rid of those landlords who give the rest of the industry a bad name.
However, amongst all of these headline-grabbing changes I’m concerned that three new tax reforms which were announced in the 2018 Budget and which are due to be introduced on 6th April later this year might have slipped under the radar. The changes could have big implications for landlords and the amount of Capital Gains Tax (CGT) payable if they decide to sell a rented property which they’ve lived in at some point during their ownership.
First of all, lettings relief will be limited to properties where the landlord lives with their tenants from 6th April. Landlords are currently entitled to relief of £40,000 on CGT, even if they don’t live at the property.
Secondly, private residence relief is being scaled back which means that landlords who previously lived in their houses before letting them out will see the period they are entitled to CGT relief cut from 18 months to nine.
Finally, it’s worth mentioning that CGT incurred following the sale of any residential property will now have to be paid within 30 days of the completion date. At present, owners can wait to tell HMRC in their tax return for that tax year, but after 6th April they will need to complete an online return and pay any capital gains due. Failure to pay within the 30 day deadline could result in HMRC imposing interest and potential penalties.
What does all this mean to landlords looking to sell a residential property? Well, to put it bluntly, if they’re considering selling a property after 6th April they may have to pay more CGT.
It’s why brokers who are aware of all the changes happening in the market are worth their weight in gold. It’s also why here at Precise Mortgages we place so much importance on education, not just for our staff but the wider market too. We run regular workshops around the country where brokers can access the information they need, and a member of our Sales Team is never far away if you’ve got a question about any aspect of the sector.
Forewarned is forearmed, so the saying goes, and with so much information for customers to absorb, it’s never been more important to ensure they’re kept up-to-date with the latest developments.
New syndicated research* for Precise Mortgages, one of the UK’s leading specialist lenders**, reveals landlords’ acquisition plans for the year ahead, with the North West expected to be the busiest region.
The study by BDRC found more than one in five landlords (22%) plan to buy in the North West followed by the South East and Yorkshire & The Humber which 16% of landlords are targeting for new properties. Regions reporting a higher proportion of buyers than sellers in the next 12 months included the East and West Midlands plus the South West and North East.
More than two out of three (68%) of buyers plan to fund their next purchase with a buy to let mortgage while just 18% will release equity from existing properties. Demand for mortgages is similar across all portfolio sizes although 23% of landlords with 11-plus properties will release equity.
Brokers continue to dominate the market – almost 73% of landlords used a mortgage broker or intermediary to arrange their last BTL mortgage, while 19% went direct to a lender. Landlords with six to 10 properties were the most likely to use brokers at 79% while 29% of landlords with one property dealt directly with a lender.
Precise Mortgages’ range of buy to let mortgages offers rates from 1.99% for a 2-year fixed rate and 3.19% for a 5-year fixed rate. Its top slicing feature is available across the entire product range offering landlords greater flexibility on loan size and the ability to choose from a wider range of solutions.
Alan Cleary, Managing Director of Precise Mortgages, said: “The increasing professionalisation of the buy to let market means landlords are becoming more focused and selective in where they buy properties and how they fund their purchases.
“Recent rate cuts across the buy to let market are highlighting the opportunities to increase portfolios and profitability as well as underlining the need for expert advice from brokers particularly among landlords with bigger portfolios.”
Full details of Precise Mortgages’ range of buy to let products are available at https://www.precisemortgages.co.uk/BuyToLet
* BDRC Q3 2019 Landlords Panel syndicated research report. Fieldwork was conducted online between 6th and 20th September 2019 among a sample of 888 National Landlords Association members
** BVA BDRC Project Mercury Report Q1 2019
Alan Cleary - Group Managing Director
According to the latest figures from the Association of Short Term Lenders, bridging loan applications in the third quarter of 2019 grew by nearly 17% on the same period in 2018, reaching £6.1bn.
The trade association’s figures also suggest that at the end of the third quarter, bridging loan books totalled £4.3bn, a reduction of 6% compared with Q2, but an increase of more than 5% on the same period in 2018.
The figures, while unofficial, show how strong growth in this sector has been at a time when transaction activity in the mainstream residential and buy-to-let sectors has been put under pressure from the ongoing political uncertainty.
They come as separate figures from Link Group suggest that P2P lending has also seen strong growth this year. According to Link, marketplace lending — which includes crowdfunded and P2P loans — hit a record £3bn in the first half of 2019, rising by more than £500m, an increase of 21.6%.
According to Link’s analysis, the sector’s performance was powered by an exceptional period of growth for property lenders — they accounted for three fifths of the additional lending in the first half, some £848m – a significant uplift of 54.5%.
We’ve also experienced a very strong year for bridging. Much of the turnover has been driven by landlords reengineering buy-to-let portfolios, adding value through refurbishment or conversion to HMOs.
This uptick has been good for those in the short-term sector; clearly there is significant value created in this market that feeds through into the mainstream markets. But we should also be mindful of the fact that strong growth and larger loan books bring greater responsibility for those loans and borrowers.
As a bank, we take this responsibility very seriously, including where we operate in unregulated markets, such as unregulated bridging. But because this market is currently partly unregulated, there are still lenders that appear less inclined to do the appropriate level of due diligence and which lend on deals that others would rightly decline.
It’s not always in the interests of the borrower to approve a loan application where the numbers look too tight.
As an industry, we’ve come a long way in cleaning up shoddy practices, such as charging interest before it is due and adding exit and extension fees onto deals. Unfortunately, these things do still go on in the darker reaches of the market. Currently, bridging lenders have the opportunity to self-regulate, but it’s possible that the senior managers regime will give the regulator more power to intervene in unregulated markets.
There are plenty of lenders, such as ourselves, who see this as a good thing. We already conduct all of our business to the standards expected of us in regulated markets. But it may pose headaches for some lenders not used to operating this way, something brokers are likely to start considering more seriously.
So, while 2019 has been a year of superb growth for short-term lenders, we expect 2020 to be characterised by some consolidation and a shake-out of any lenders that continue to cut corners. For borrowers, that will mean better protection. For brokers, it will mean working with responsible, stable lenders that are in this market to stay. And for the lenders that remain, it will mean a bridging book that is both resilient and profitable.