Alan Cleary, Managing Director at Precise Mortgages
It’s been nearly a year since new legislation was introduced to improve the living standards of tenants residing in Houses in Multiple Occupation (HMOs).
Landlords must now ensure that all properties occupied by five or more people forming more than one household and sharing facilities, such as a bathroom or kitchen, are licensed with their local authority. They must also ensure that any room in the property with a floor area of less than 4.64 square metres is not used as sleeping accommodation. Landlords failing to adhere to the new rules could face punitive fines – up to £20,000 for failing to register a property that needs licensing and up to £30,000 for not meeting the minimum room size requirements.
It was initially feared the new legislation, which the government estimated would affect around 160,000 properties, could put the brakes on what has become an increasingly popular area of the market in recent years. Some thought the cost of the work needed to convert properties to obtain a licence or the loss of income from rooms that were now too small under the new rules could put new investors off or persuade existing HMO landlords to exit the market.
However, it appears those fears were unfounded. Not surprisingly, landlords looking to rebalance their portfolios after years of being buffeted by the storms from the regulatory and tax changes are still tempted by the attractive rental yields potentially on offer. Many landlords are also attracted by the peace of mind that comes with knowing that rental income is more secure, even if one tenant leaves a void.
This is backed up by research from BVA BDRC which shows that HMO landlords are still benefiting from the highest average rental yields in the market at 6.3%, almost a full percentage point more than the overall average rental yield of 5.5%. The HMO sector of the market looks well set for further growth over the next year, with 21% of landlords saying they plan to buy an HMO property in the next 12 months and only 8% saying they were looking to divest a property.
What the figures show us is that there is still a considerable appetite among landlords looking for alternative ways to boost their profits. As the market becomes more professionalised and the traditional buy-to-let ownership model morphs from single let properties to properties with multiple tenants, it’s vital these landlords are given the support they need.
I can’t answer for other lenders, but here at Precise Mortgages our doors are always open to landlords with HMOs; experienced landlords will find a range of mortgages designed to help them develop their portfolios.
We’ve recently extended our top slicing feature across our entire buy to let range to include HMO customers. It means landlords can now use their surplus earned income or portfolio income to demonstrate they could meet any financial stresses on their new property, rather than through the rental income of the property alone. We now also offer Refurbishment Buy to Let for works being completed under permitted development rights, provided there are no structural alterations or changes to the footprint of the property. This is a really exciting development as it allows landlords to change the use of a property from a C3 dwelling house to a C4 HMO for up to six bedrooms.
So as some doors shut in certain areas of the market, different ones are opening up, particularly for those investors who are prepared to step over the threshold and explore the new opportunities on offer.
Alan Cleary, Managing Director at Precise Mortgages
The latest figures suggest that short-term lending experienced a boom in the second quarter of the year, with more than £1bn worth of bridging written during Q2 2019 — an 11.8% increase on the previous quarter and a 4.1% increase on Q2 2018.
While I agree that the bridging market, which is currently worth more than £4.6bn, is in good health at the moment, these figures include a constantly fluctuating mix of both residential and commercial loans, making it difficult to extrapolate meaningful trends.
I find a more helpful indicator of the opportunity bridging finance offers is behaviour in the buy-to-let market, which is more often than not where short-term loans exit to. There are several established trends in buy-to-let at the moment, none of which are new, but all of which point to the potential for further growth in certain parts of the bridging market.
We recently conducted research with BDRC and found that the proportion of landlords deriving a profit from letting edged down again in Q2. Although net profitability remains very high overall, at 81%, it’s the first time ever there have been three successive declines.
Another interesting finding was that a record proportion of landlords are planning to divest property in the next 12 months. Some 26% of landlords told BDRC they intend to sell at least one property from their portfolio in the next year, up eight percentage points from Q1 and the highest level of planned sales ever recorded. The proportion intending to sell is three times higher now than it was at the start of 2015, when it was 9%.
Taken at face value, this might look less than positive for buy-to-let, but look deeper and these numbers tell a different story. Buy-to-let has been going through a significant restructure over the past four years; it is one that is not yet over. But the number of landlords planning to sell doesn’t mean there’s about to be a mass exodus from the market. Pressure on profitability is a kicker to improve the status quo — there’s a good chance the two figures are closely related.
Seen in this light, landlords’ plans are actually very reassuring. There are a number of well-worn changes that have become increasingly pronounced in buy-to-let since 2015 when the tax changes affecting landlords were first announced.
The phased reduction in tax relief on buy-to-let mortgage interest is already influencing how professionals prefer to structure their portfolios on purchases. There will soon come a tipping point, where the numbers make the sale of existing properties, held in their personal names, the sensible thing to do financially. That does not preclude the repurchase of those same properties or the purchase of other, better yielding ones, through the limited company route.
I suspect that the BDRC figures are indicating this already, and that highlights the opportunity for the short-term sector. A rise in the number of lower-yielding buy-to-lets coming on to the market provides a strong pipeline for refurb bridging business — something we are already experiencing.
The launch of our refurbishment buy-to-let proposition, which combines bridging finance with a buy-to-let refinance with one underwrite (but two proc fees), is proving popular at the moment, revealing the opportunity to improve yields on properties that have been sold by landlords for whom they no longer make commercial sense. That, clearly, doesn’t make these properties a dud for all landlords, especially those willing to refurb in a way that improves the yield on that security.
The phasing out of mortgage interest tax relief is ongoing and many landlords will not yet have reached their own personal tipping points, meaning this particular trend is likely to continue for the next few years at least.
Far from being a negative outlook, we consider the changing face of buy-to-let to be a driver of sustainable business growth in both the longer-term buy-to-let side and bridging sector, too.
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