Alan Cleary - Managing Director of Precise Mortgages
August is usually a quieter month for those of us in the bridging world. It tends to coincide with estate agents going on holiday, fewer properties being put on the market and a general reset before school term starts in September and the year begins again.
This year has been a different story, for us at least. Rather than see a seasonal slowdown, we've actually seen bridging enquiries and completions pick up. I've been asked whether this summer rush has anything to do with the base rate rise earlier this month, but my sense is not. While in the mainstream residential market, interest rate changes can have a noticeable effect on customer behaviour, particularly in the remortgage market, bridging doesn't really work like that.
Consider the path of bridging rates over the decade. They've gone from around 1.5 per cent a month, when the base rate was 5.75 per cent in 2007, to a low of 0.49 per cent a month today, when the base rate is at 0.75 per cent. Rates in the bridging market are more a function of competition between lenders, the cost of funding and, increasingly, the evolution of specific niches in the market.
Bridging has always been used to fund the purchase of property at auctions, to finance refurbishment projects and to bridge the gap between the purchase of a new home and sale of an old one. But 10 years ago, there was one price for every scenario, give or take a couple of basis points. Today, the market is far more sophisticated.
Products have evolved and pricing has diverged to match the specific risks that each scenario represents. Generally speaking, a light refurb deserves a lower rate than a development project. A consumer whose sale has fallen through at the last minute due to reasons controlled by the purchaser is even lower risk typically.
Cost of funding has also been a big driver of competition in the short-term market. In 2010 private equity, hedge funds and investment banks were struggling to find decent returns anywhere. Bridging providers were still offering eye-watering returns in excess of 20 per cent. It was a no-brainer. Today, there's a lot of this money still in the market, demanding returns of around 15 per cent. But to offer this, lenders must charge a rate averaging around 1.5 per cent a month to turn a profit. For the majority of sensible deals, that is a rate that is no longer competitive. The entry of lenders with access to retail deposit funding has facilitated much more competitive - and fair pricing.
At Precise, we've always been committed to pushing the market towards serving customers better. We've innovated on product design over the years, launching the market's first bridge-to-let back in 2013. Today, this is a staple product across the market. This commitment to giving our customers what they want, and pricing it as competitively as we can continues. We now offer our lowest ever bridging rate at 0.49 per cent - something that could account for our recent uptick in business. Because we're a full service lender, we also pay close attention to adjacent markets. Our buy-to-let team have just launched a holiday let product and we're now accepting multi-units. This is particularly important in the bridging market, as exit is king.
It's no secret that landlords are under pressure following the tax changes. But those who are rebalancing their portfolios, selling off less profitable properties and purchasing lets with better returns, are in our view good business. Bridging is often key to making this transition, particularly given the higher cost of stamp duty now levied. The wider housing market may be becoming more subdued, but there are still plenty of opportunities to be found with the right partner.
Alan Cleary - Managing Director of Precise Mortgages
When it comes to where to invest in a buy-to-let property today, the prevailing wisdom seems to be the Midlands. Cities such as Birmingham and Nottingham are increasingly popular, while further north Liverpool, Manchester and Leeds are hives of activity for landlords looking to expand portfolios – particularly if they’ve recently sold up in London or the South East.
We’ve seen our fair share of lending in these locations, but contrary to the tide of surveys tipping Birmingham as this year’s buy-to-let hotspot, I believe London is still a great market.
Now, hands up, I know the vast majority of brokers are outside the capital – I live in the Midlands myself and know how frustrating it can be to read about London’s housing market as though the rest of the UK was exactly the same. It’s not. But bear with me, because I think London might be a better prospect than the headlines would have you believe at the moment.
We recently commissioned some exclusive research from BDRC and found some interesting numbers that tally with our own experience.
London has been through a couple of years of house prices under pressure and there is definitely evidence that a lot of landlords in the capital have been offloading unprofitable properties following the tax relief changes.
Brexit has also prompted many of the big banking and financial services providers headquartered in London to move staff back to the continent over the past couple of years, putting a severe dent on demand for premium rental stock in central London. Rental incomes suffered as a result.
There’s also been a lot of new stock of flats for rent coming onto the London market over the past 24 months, adding to the pressure on rents.
The combination of these factors means that now, savvy landlords are finding there are some good deals to be had in the capital – an area of the UK that has historically always delivered excellent capital growth.
For example, BDRC found that the situation in central London is showing signs of improvement with a 5 per cent increase in the proportion of landlords reporting increasing demand from tenants. The proportion of landlords reporting falling rents in central London in Q2 has also halved from Q1.
According to BDRC’s research, mean rental yields in the capital remain strong with central London returning 6.2 per cent and outer London 5.9 per cent. These are not insignificant returns, and where properties are flooding onto the market, there’s also plenty of scope to get a decent discount on purchase prices, which can go some way to offsetting the higher stamp duty costs.
In spite of the tide of so-called ‘dire’ warnings about the property market in London, we think there’s opportunity to be found.
Alan Cleary - Managing Director of Precise Mortgages
The clock’s ticking for HMO landlords to make sure they’re ready for the introduction of new licensing legislation due to come into effect in October. From the beginning of the month, the government will be enforcing its new HMO licensing rules which are forecast to bring tens of thousands of landlords not currently in the scope of regulation under their purview.
As it currently stands properties that are three or more storeys, have five or more tenants in two or more single households or where amenities such as the kitchen are shared must be licensed.
From October, the number of storeys will become irrelevant and HMO licensing will be required where there are five or more tenants in two or more single households. Certain flats above commercial properties let out on this basis will also come into the regime from next month, as will some smaller blocks.
According to the Residential Landlords’ Association, 16 per cent of landlords currently rent to people in HMOs. Their analysis suggests that an additional 177,000 HMOs will become subject to mandatory licensing in England as a result of October’s extension of the rules*.
It means if properties aren’t up to the new regulatory standards by 1st October then landlords can be prosecuted by their local authority and fined up to £30,000 per unlicensed property.
While it’s up to landlords themselves to make sure they don’t get hit by these new rules, it’s something that all lenders will be keeping a close eye on.
The HMO and multi-unit market has become an increasingly important one for both landlords and lenders. As the financial reality of the tapered removal of tax relief on mortgage interest has sunk in, landlords who are ahead of the game have been reviewing their portfolios, selling up those properties that no longer add up and, in many cases, replacing them with others that have stronger financial possibilities.
While this has partly precipitated a general wash of activity out of London’s most expensive areas, into the commuter suburbs and further north to the cities of Birmingham, Liverpool, Nottingham and Leeds, we’ve also seen stronger activity in the capital and the South East too. This has shifted from single unit to multi-unit properties though, with a strong bent towards HMOs.
The advantage of letting houses in multiple occupation and multi-unit properties boils down to risk management. More tenants on separate tenancy agreements means your eggs are spread across multiple baskets. If one tenant falls behind on rent or ducks out of their agreement early, the other 80 per cent of your rental income is still coming in, covering off the mortgage. The same is true of multi-unit.
These types of property also tend to appeal to landlords with slightly larger portfolios and more experience in running them. Emotional attachment to properties is absent; they’re running a business and as such, the numbers need to make sense
In our view, these are exactly the sort of borrowers we want to work with on buy-to-let. The smaller portfolio end of the market is no doubt the larger portion, but that is changing slowly. It’s also catered for by lenders that wish to have minimal touch on the underwriting of these, typically, more straightforward and uniform cases.
We’ve never tried to compete with the mainstream. Our expertise has always been understanding the niches in the market across buy-to-let, residential and short-term lending and this is why we’ve been busy developing criteria that helps to provide the changing shape of the market with the products needed to remain competitive in the future.
We’ve improved our criteria on multi-units for those landlords who have identified the future potential of this property type and want to extend this part of their portfolios. Experience multi-let landlords can now have up to six self-continued units within a single freehold and borrow up to £750,000 at 75 per cent LTV, and up to £1m at 70 per cent LTV.
While the political, tax and regulatory landscape for landlords remains a challenge, there are still undoubtedly opportunities available for landlords who know what they have to do to stay ahead. For our part, we’re trying to make the shift as smooth as possible.
Precise Mortgages, the specialist lender, is launching into the holiday buy-to-let market and enhancing criteria for its multi-unit range in response to growing demand from brokers supporting professional landlords.
Syndicated research* carried out for the specialist lender by BDRC shows nearly one in 10 (9%) landlords with more than 20 properties owns holiday lets in the UK with a further 9% owning holiday lets abroad. For all landlords interviewed as part of the survey, holiday lets were the second most popular property type to own in addition to residential portfolios.
The specialist lender will consider UK applications on houses and flats currently utilised as holiday lets providing there are no planning or occupancy restrictions.
Experienced individual and limited company landlords wanting to invest in a holiday let can choose from Precise Mortgages’ core buy to let range with rates starting from 2.77% and borrow up to £500,000 to a maximum 70% LTV or opt for a bridging finance loan.
The holiday let option is part of a raft of buy to let and bridging criteria enhancements to help landlords wanting to take advantage of evolving market opportunities.
The criteria changes are being launched to help more customers secure the product they need – its syndicated research* found 12% of all landlords own multi-unit properties rising to one in three (34%) among those with 20-plus properties.
Experienced individual and limited company landlords investing in multi-unit opportunities can now have up to six self-contained units under a single freehold and borrow up to £750,000 at 75% LTV and up to £1m at 70% LTV.
Alan Cleary, Managing Director of Precise Mortgages, said: “The UK is proving increasingly popular among both British and overseas tourists which is generating attractive rental returns for holiday lets. The new criteria across the buy to let mortgage and bridging finance ranges will help more customers secure the product they need.”
Full details of the buy to let mortgage and bridging finance criteria enhancements can be viewed by visiting the online criteria glossary on the Precise Mortgages’ website at www.precisemortgages.co.uk/Criteria/Glossary.
*BDRC Q2 2018 Landlords Panel syndicated research report prepared for Precise Mortgages. Fieldwork was conducted online between 8th and 25th June among a sample of 681 National Landlords Association members
Alan Cleary - Managing Director of Precise Mortgages
The number of self-employed workers in the UK has risen significantly in recent years, climbing from 3.3 million in 2001 to just shy of 5 million in 20171.
The vast majority of that growth has come with the rise of the gig economy, which now employs an estimated 1.3 million people in the UK2. They also need somewhere to live - just like those of us who run our own businesses on an employed basis.
The number of people in self-employment is only set to grow. A recent survey by the British Chambers of Commerce of more than 1,000 businesses of all sizes and sectors found that around one in six plans3 to deal with the rise in the National Living Wage over the next three years by expanding the number of gig workers they use. It’s a flexible way to manage the ebb and flow of business firms have to service. It’s also cheaper.
However, it doesn’t always work so well in the favour of the gig workers themselves. While many seem to value their own flexible hours, we’ve seen growing dissatisfaction with other aspects of being self-employed in this way. Nowhere has that been so clear as during several court cases involving employees of gig economy firms claiming the right to be treated as employed workers rather than as self-employed. The cases involving Uber and Pimlico Plumbers were won, meaning their self-employed workers now qualify for certain benefits such as holiday and sick pay. Deliveroo, another company heavily reliant on gig workers, meanwhile fended off a similar action by its workers.
This isn’t just about holiday and sick pay though. The knock-on effects of being self-employed are many, not least the fact that it can be harder for those not in the PAYE system to secure a mortgage in the early days of self-employment.
It was therefore interesting to see the latest bid to adapt our economy to the growing number of self-employed workers in the UK, which came from the Office of Tax Simplification (OTS) last month.
In a discussion paper, it recommended that the Treasury require firms that operate largely by hiring self-employed gig workers to pay wages after tax.
This retained tax would then be paid directly to HMRC. If adopted, it would effectively shift a whole generation of gig workers out of self assessment and back into PAYE.
While the OTS said its aim is to collect more tax, the suggestion highlights just how significant a part of our working population those in self-employment have now become.
This contingent is formed not just of gig workers, but includes the millions of small and medium sized businesses that form the backbone of the British economy.
Particularly during a time when large companies are signalling that no deal on Brexit could result in them taking jobs out of the UK, we must ensure they get a fair deal on basic rights to work and live.
So it’s worrying that so many consumers still perceive it to be so hard to secure a mortgage as a self-employed worker or business owner.
The reality is that over the past three years or so, it has got considerably easier.
There are lenders that will accept one year of fully signed off accounts as proof of income - it’s no longer a write-off if you’ve been self-employed for fewer than three years. Affordability may not be so straight forward to evidence as PAYE, but it’s far from difficult. Especially for lenders with underwriters who specialise in this type of affordability assessment.
But there’s clearly still a bit of a disconnect - one of the biggest barriers to getting accepted for a mortgage today has strangely become being confident enough to apply.
Brokers are invaluable in situations such as this. Brokers have the power and access to lenders who can say – let’s figure out how.