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.
Alan Cleary - Managing Director of Precise Mortgages
Is anyone else fed up with hearing dire warning after dire warning on Brexit? It feels as though not a day goes by without the front pages revealing yet another politician has walked out over the Brexit negotiations, one retailer or another threatening to up sticks to Europe if Mrs May can’t get her government together, air traffic control telling us all flights will be grounded or doctors claiming we’ll run out of medicine.
Brexit has dominated the debate in newspapers, television, Westminster and dinner parties for more than two years now and, deal or no deal, it’s taking its toll on the UK. The reality is that regardless of whether Mrs May gets her soft Brexit or Boris gets his hard divorce, public uncertainty about our future economic resilience has become entrenched. This is showing in the housing market - often a good measure of public sentiment. While house prices have remained pretty flat on annual measurements, we have seen the odd monthly fluctuation across several of the indices. London and the South East particularly have seen some softening in values.
Falling house prices are feared by consumers, but over the past ten years, the fear has been pretty unfounded in most areas (there are notable exceptions to this rule - Northern Ireland being the obvious example). This is largely down to two things: the chronic lack of supply of new homes being built in the majority of England and Wales and people’s unwillingness to move, crystallising a perceived slump in the paper value of their home and incurring an unwanted stamp duty bill on the purchase of their next home.
The net result has been a severe lack of stock for sale. The latest RICS survey showed new sales instructions rose in June, but new buyer enquiries remained flat. The stock of unsold homes per surveyor edged up, from 42.7 homes in May, to 43 in June. But the latest reading is still close to a record low. This shows in the mortgage lending figures too, where growth in residential lending has largely come from remortgaging. Equity release lending meanwhile continues to strengthen, suggesting many older homeowners are choosing to extract capital from homes to make improvements or changes to their existing properties rather than downsizing and being hit with a whopping stamp duty bill.
At Precise Mortgages, we’re always thinking about what customers need and how to provide brokers with the best range of tools to service those needs. We’ve been lending up to 75 per cent loan-to-value on unregulated bridging for a while and we believe that even this is still a sensible and fairly conservative LTV. That’s why this month we decided to up our maximum LTV on regulated short-term deals as well. The purchase side of the housing market is stuck in a limbo that is only being exacerbated by the indecision our politicians have shown throughout these Brexit negotiations. But life goes on regardless and we don’t believe ordinary people should lose out when it comes to something as important as where they live as a result.
I’m still fed up of hearing about what may or may not happen next March if parliament ever manages to agree a deal. But at least we can provide a degree of certainty, however small, for those whose financial plans would otherwise be derailed.
Alan Cleary - Managing Director of Precise Mortgages
It’s been barely five months since the Spring Statement was delivered and landlords across the country breathed a sigh of relief to find there were no further tax shocks in store for them. I hope that relief will not be short-lived. In August rumours emerged that the Chancellor Philip Hammond may be considering another tax hike for landlords in his Autumn Budget; specifically, raising the stamp duty payable on buy-to-let purchases even further than the existing 3 per cent surcharge.
The latest Office for National Statistics numbers showed stamp duty revenues fell in the second quarter of the year, down 11 per cent compared to this time last year1. You could argue that stamp duty is not only dampening appetite for buy-to-let purchases, but in high value areas across the country, including most of London and the South East, the high tax bills that face homeowners looking to move are also putting them off.
I am inclined to think that raising buy-to-let stamp duty again would not accomplish much. Purchases are already significantly down from that final quarter before the changes came in at the start of April 2016. Charging landlords more up front is most likely to push up costs for tenants - and they are the ones saving to enable them to buy. Eating into that saving power is unlikely to prove popular with voters who are also would-be first-time buyers.
Instead, it’s the Bank of England’s affordability measures that have had a bigger effect on buy-to-let. The move to require tougher stress testing and higher interest calculation ratios has already pushed some landlords out of the market. However, this is more likely to be the case for private owners who were highly geared and were taking a punt on property rather than for professional landlords who understand the commercial dynamics of buy-to-let and recognise the risks.
We recently commissioned research from BDRC which confirmed our view that landlords are still able to make decent returns by investing in residential rental properties but that the tax changes have encouraged them and their brokers to review how they structure their portfolio finances.
Almost three quarters of the brokers questioned said they’d personally experienced a rise in the number of their landlord customers opting to take five-year fixed rates. August’s rise in the base rate to 0.75 per cent demonstrates the Bank of England’s clear commitment to return the UK economy to a more normal interest rate environment. That makes fixing at today’s lower five-year fixed rates look like a sensible idea.
For landlords who know they wish to stay put for that length of time, great. But we all know that five years can see priorities change dramatically. Brokers tell us there’s still a big demand for shorter-term rates from landlords still considering how to rebalance portfolios geographically - especially because the full force of the reduction in tax relief on mortgage interest will not be felt for another two years at least.
Our BDRC research found that 68 per cent of brokers said more customers who choose five-year fixes would choose shorter fixed rate periods if they could achieve the same loan using top slicing.
In some cases no doubt this is true, many lenders have chosen to offer flat ICRs at the top end of the stress test. But there are now several lenders out there seeking to offer more flexible ways to apply the ICRs to help landlords satisfy the Bank of England’s affordability requirements, including ourselves.
Using additional income sources to top up rental income does not necessarily mean using that additional income to pay the mortgage; it’s there as an affordability safety net over the next five years. There are more answers out there for landlords than there seem.
That said, I very much hope that the Autumn Budget has no more surprises in store for landlords - either in the shape of stamp duty changes or tax relief withdrawal above those already in motion. The market is still adjusting to the considerable change of the past two years. Let’s not make it harder for everyone before we see how the current game plays out.