Alan Cleary - Managing Director of Precise Mortgages
As if landlords haven't enough to think about with the usual day-to-day of running their portfolios, tax-planning and managing their financials, this month brings yet more change for landlords with the extension of licensing rules on HMOs, which came in on Monday 1st October.
According to recent research*, the changes are set bring more than 160,000 properties into the HMO licensing regime.
For clarity, the new scope of the rules mean that any property let to five or more tenants from two or more households will, regardless of the number of floors, now have to have a valid HMO licence. This is a big shift from the previous licensing rules which applied only to properties with five or more tenants from two or more different households where the property was three or more storeys.
If landlords fail to get their licence, local authorities will be able to fine them up to £30,000 and, in extreme circumstances, bring criminal charges against them. It sounds extreme, but the government justifies the licensing extension because of ongoing poor conditions in the private rental sector.
While I have no doubt there are plenty of examples of landlords stuffing properties full of tenants in dreadful conditions, it's far from the norm. I've seen relatively little from lenders on the subject of how they plan to deal with the licensing changes.
I can't answer for other lenders, but for Precise Mortgages all mortgage applications where the security is captured under the new licensing rules will require a valid licence to gain approval. It's the law.
Landlords are businessman, and it's their responsibility to ensure that they operate in ways which are compliant with the law. At Precise Mortgages, we are careful about who we lend to and that the security is what the application claims.
This becomes even more important when lending to professional landlords with multiple properties. The more complex the financial position of the borrower and the nature of the security, the more careful our underwriters are.
Our doors are open for landlords with HMOs - we think, generally, that this type of landlord tends to be experienced and commercially driven. That continues to be our view, licensing change or not.
Affected landlords who will need to remortgage onto a specialist HMO product after the changes are expected to comply with the law by government. We will also expect them to comply with the law.
But that doesn't mean we won't be lending to them. The same very basic rules apply. If the maths adds up, then we're on board.
Precise Mortgages has launched a brand new Refurb Buy to Let proposition designed to help landlords maximise rental yields by refurbishing a target property before renting it out, as well as enabling them to take value from the property to reinvest elsewhere.
The specialist lender’s exciting new product gives customers access to great bridging finance rates together with the peace of mind of knowing they have an exit onto a long-term buy to let mortgage already in place once the work has been completed.
The proposition, which is only available through mortgage intermediaries, is suitable for a wide range of landlords, including personal, limited company and HMO applicants, and offers ICR options to help with affordability. Customers must be confident they can complete any refurbishment work within the buy to let offer validity period.
It is supported by a streamlined process designed to make placing a case with the lender as easy as possible.
Bridging rates start from 0.49% per month and customers can choose from a range of competitive products. No mortgage repayments are required whilst the refurbishment works are being completed.
Alan Cleary, Managing Director of Precise Mortgages, said: “With landlords looking at different ways of boosting their profits, this product gives them a new way of increasing rental yields and capital values. Landlords have traditionally faced difficulty in securing finance to refurbish a property before letting it out. This product enables them to do so, and it is backed up with a host of features which are designed to make applying for it as easy as possible.”
Joe Breeden, Managing Director of Crystal Specialist Finance, who were one of the firms on the pilot, added: “We completed a Refurb Buy to Let case in 17 days from start to finish. We have a very happy client, a positive outcome and a good experience. We have plenty more of these cases to send to Precise Mortgages.”
Alan Cleary - Managing Director of Precise Mortgages
The Budget has been and gone, and for the first time in a few years there was relatively little fanfare for the housing market. The usual cries to reform Stamp Duty from across the property market fell on deaf ears, though last year’s Stamp Duty exemption for first-time buyers was extended to shared ownership. That, I think, was more to pay lip-service to housing than contribute to solving the UK’s supply problems.
There were also some changes to lettings relief which will affect accidental landlords, but then the previous raft of changes to buy to let tax relief have already put paid to that end of the market largely. There were some minor changes to planning too.
So the Budget’s done and Brexit’s still to come, but I’m more concerned about the here and now. Instead of focusing on the negatives, I’d like to concentrate on some of the positive things that are happening in the market. Here are four things that, to my mind at least, give cause for optimism in a world that is still very uncertain.
A record proportion of landlords are making a profit from their lettings activity
Recent research conducted by BVA BDRC1 has found that 88 per cent of landlords made a profit from their lettings activity in the 3rd quarter of 2018 – that’s an increase of 2 per cent from Q2.
Perceived tenant demand is increasing
The BVA BDRC research1 found that the proportion of landlords reporting a drop in tenant demand has fallen by 8 per cent from the end of June 2018 – the lowest point since the end of 2016. The situation in Central London continues to improve with a 9 per cent increase in the proportion reporting increasing demand and a 14 per cent fall in the proportion who feel that demand has fallen in the last three months.
More customers are planning to buy rental property within limited company structure
The BVA BDRC research1 also found the number of customers planning to buy rental property within a limited company structure continues to grow and has risen by 12 per cent over the last six months. The proportion of landlords with three or fewer properties planning to buy their next rental property as a limited company has almost doubled since the last quarter, whilst the proportion amongst portfolio landlords (that is customers with four or more mortgaged buy to let properties) remains stable at around one in two. There has been a corresponding 8 per cent fall in the proportion planning to buy a rental property as an individual.
Buy to let mortgage rates have never been lower
Moneyfacts data2 puts the average five-year fixed rate at 3.4 per cent in October compared to 3.55 per cent in April and 3.77 per cent this time in 2016. That’s astonishingly good value given the fact that, since then, the Bank of England has raised the base rate not once, but twice. Add to that the fact that money market rates are also rising with the ever-nearing Brexit deadline and still no firm deal on the table, and it’s unlikely that these rates will be around indefinitely. This is reflected in the figures – August’s remortgage approvals hit nearly 14,000 according to UK Finance, up 4.5 per cent on the same month last year3.
Here and now
So what does this all mean? Despite all of the doom and gloom being reported by the media, I believe the buy to let market is very much alive and kicking, although it looks different to what it did a couple of years.
While smaller landlords are finding it tougher and might be thinking of selling up, those with larger portfolios are shifting their attentions to new areas of the market.
Properties purchased through a limited company structure, for example, are unaffected by the reduction in mortgage interest tax relief and landlords can continue to deduct interest from the rental income to calculate the profit on which tax is calculated. Elsewhere, HMOs and multi-unit lets offer landlords the opportunity to attract higher rental yields and provide a more consistent source of income during void periods compared to single occupancy properties.
Specialist lenders such as Precise Mortgages understand the evolving market and customers’ changing needs and can offer a range of buy to let mortgages designed with this new-breed of customers in mind. When one door closes, another one opens, and there are still plenty of opportunities out there for discerning borrowers.
1BVA BDRC Landlords Panel Syndicated Research Report Q3 2018
2Moneyfacts press release. 16th October 2018. Average five-year fixed BTL rate lowest on record
Alan Cleary - Managing Director of Precise Mortgages
The past month has been a bit of a roller coaster for headlines in the property press.
Rightmove's index, which tracks asking prices, showed a monthly rise of 0.7 per cent for newly marketed properties - a relatively healthy figure and in line with Septembers every year going back to 20111. The index's authors noted that the national annual rate of increase remains muted at 1.2 per cent, but there are some positive signs for the autumn market in regions where affordability and sentiment are good. They also acknowledged that stretched buyer affordability or negative market sentiment in other regions is limiting price growth.
Haart estate agents then came out with some positive figures on monthly transaction levels in September, showing a 10 per cent jump in transactions across England and Wales on the month to the highest level since November 20162. And we've had figures from the ONS showing that average house prices on completed sales in the UK have increased by 3.1 per cent in the year to July 2018, down slightly from 3.2 per cent in June 20183.
So it came as a surprise for many when the papers reported that Mark Carney, governor of the Bank of England, had warned that house prices could fall by a third if the Government can't agree a deal with Europe over Britain's exit from the EU in March next year.
In fact, that's not quite what he said. In describing worst-case scenarios for stress-testing affordability on mortgages, Mr Carney suggested that banks and building societies might consider stressing affordability in the event that property prices were to collapse by a third. He was, sensibly, describing an Armageddon scenario that he does not believe is likely to materialise - even if Britain crashes out of the EU next year. If we learned anything from the last crash in the economy, it is to expect and anticipate the unexpected.
However, the unhappy truth is that Mr Carney's comments, taken out of context, made for a great shock headline. And buyers and sellers read those headlines and it will influence both confidence and appetite to buy and sell property.
While the Bank of England is right to ensure financial institutions are prepared for a downturn, thus protecting customers, there is a danger that they have talked down a market that is already subdued. I won't debate the wisdom of this, but it highlights a real opportunity for property investors who understand the value of adding value.
There is still plenty of appetite for well-priced property and following the exit of several thousand amateur buy-to-let investors, there are bargains to be found - particularly for those looking to expand larger portfolios held within limited companies and who are prepared to do some refurbishment work before letting.
Markets are cyclical and anyone in property knows that - and knows how to deal with it. Luckily for them, there are also lenders in the market with appetite to fund those deals - even in light of uncertainty over Brexit, British people still need somewhere to live.
Alan Cleary - Managing Director of Precise Mortgages
It’s nearly the Autumn Budget time of the year again and, this year, the Chancellor Philip Hammond has opted to deliver his government’s Budget on a Monday, ditching the usual Wednesday tradition. Writing this as I am, before we know the outcome of his statement, it’s hard to second guess what it will contain. That said, there are the usual calls that start to come out of the woodwork around Budget day: stamp duty reform, commitment to support building and infrastructure and this year, perhaps loudest of all, some clarity on the future of the Help to Buy scheme.
The scheme has been in the press a lot over the past couple of months, with allegations made that as well as providing support to tens of thousands of first-time buyers, it has helped inflate house prices and, consequently, the profit margins of the construction firms. There has been talk of extending the scheme but in an amended format, perhaps with an eye on its effect on house price inflation. The government has resolutely refused to be drawn on its plans for Help to Buy in the run up to the Budget, focusing instead on the other B word.
Whatever the outcome for the scheme on 29th October, it is currently scheduled to close in 2021 and because builders require a long lead-in time to plan housing starts, we have already begun to see the effects of its possible closure.
Government statistics* revealed that new housing starts dropped in the second quarter of this year - a 3.7 per cent fall compared to the previous quarter. On an annual basis, starts are down by 4.1 per cent. In July, housebuilders reported the steepest fall in site visits and net reservations since 2010 and 2008 respectively. They also reported the fastest rise in the use of sales incentives in over six years.
The fall in new starts is undoubtedly linked to uncertainty on the future shape of Help to Buy, but it is likely as much to do with uncertainty on the terms of Brexit. Construction is not immune to the effects of reduced immigration and the potential loss of skilled and cheap labour, as well as the effects of a weak pound on building costs.
House price inflation across the board is also softening and new build isn’t immune. But let’s not give the stats too much credit. This type of data and insight is useful for businesses in planning their future strategies, but the reality is that the Help to Buy scheme, whether or not Mr Hammond extends it during his Budget, is still very much open for business today.
Lenders are committed to supporting the scheme and while a year ago there were limited options available to buyers looking to remortgage their Help to Buy loans, there is now a lot more choice and competition. We should also not forget that there is considerably more competition at the high loan-to-value end of the market as well, a stated aim of the scheme when it was first launched.
At Precise Mortgages, we are a big supporter of Help to Buy as well as new build. We have a range of products designed with this market specifically in mind and our LTVs reflect our ongoing belief that this part of the market is vital to a healthy housing sector all round.
As I write, we’re also in party conference season – yet another reason that there is so much clamour from the industry for policy change and support for housing. While I’m usually in favour of any measures that support our market, I’m also inclined largely to ignore the noise this time of year creates.
I’m more interested in the fundamentals faced by real people. Namely that home ownership remains the ultimate aspiration for most people living in Britain, and Brexit isn’t going to change that; that we haven’t got enough houses in this country and Brexit isn’t going to change that; that the latest analysis from the Office for National Statistics suggests that rising divorce rates and longer life expectancies mean that the number of households in the UK is going in one direction only, up, and guess what, Brexit isn’t going to change that.
Yes, we must keep in mind that Brexit is spooking buyers and putting a bit of a dampener on their keenness to commit to buying while politicians continue to bicker about what deal we can reach. But we must also remember that people are still getting married and divorced, people are still having children and getting older. And all these people need somewhere to live. In times of uncertainty, both lenders and brokers are in a position to offer these people a degree of stability – something we fully intend to do.