New buy to let borrowing is expected to decline this year as landlords get to grips with stricter regulation and a harsher income tax environment. But is the market as depressed as many headlines would have you believe?
As we plough into the second half of 2018, it feels like a good time to take stock of the buy to let market. David Whittaker, CEO at Mortgages for Business, tells it as he sees it and suggests where it might be heading.
Too often, I find myself reading news articles with sensationalist headlines. The subject matter varies but many are getting across the same message - that landlords are facing tougher regulation, are having to be more accountable and will earn less.
On the wider landscape, these bold statements may well be true but only in part. Once you get down to the nitty gritty, a different picture emerges.
Yes, it’s tough out there for landlords. But it’s not impossible! Let me bust some of the recent myths I’ve been reading in the headlines and also address some of the common themes I’ve encountered when chatting with landlords at events up and down the country.
Getting a mortgage is nearly impossible if you are a portfolio landlord
UNTRUE. Categorically, this is not the case. Most lenders are still lending to portfolio landlords. Some set limits on the size of the portfolio, i.e. up to 10 properties but there are numerous specialist lenders who will accept landlords without imposing any limit on the size of portfolio.
The myth is probably circulating because the regulator now requires lenders to look more closely at mortgage applications from portfolio landlords. This means that some borrowers may find that their options are more limited than before. Lenders now have to consider the landlord’s:
- Experience in the private rental sector
- Entire portfolio and the aggregate debt (i.e. all outstanding mortgages) and how this might be affected by any new borrowing
- Buy to let business strategy. Some but by no means all, may want to see a business plan, as well as historical and future expected cash flows from the portfolio
- Assets and liabilities, including their tax liability, particularly in light of the new tax regime for buy to let landlords (but how you define the tax liability is beyond me!)
TRUE. The majority of our buy to let clients are portfolio landlords and we continue to help them to secure the finance they need to grow and remortgage their properties as lots of our recent case studies will attest.
Rental yields are falling
NOT EVERYWHERE. It depends on where you are investing. A recent report by Savills suggested that in London yields were down by 3.2% but in the rest of England and Wales they were up by 1.7%. Reports on property prices and rental yields are published regularly from a variety of sources. The point is, landlords have to do their homework. Rental yields are certainly not falling everywhere.
A couple of weeks ago, John Heron, managing director of Paragon Mortgages stood up at an industry event and confirmed that they had evidence that rents were holding fast and even rising in some areas. And believe me, when John Heron speaks, the industry listens.
Buy to lets are a pension blackhole
I laughed out loud when I read this one! The article I read was essentially saying that because of the tax changes, any income you thought you may get from your buy to let when you retire will be reduced/obliterated. In my opinion, there are a couple of points to counter that stance:
The change in income tax relief will predominantly affect landlords with properties that are mortgaged, so if you pay off the mortgage, or at least reduce it, this will mitigate the tax position.
Assuming you don’t increase your borrowing during the period of ownership, the mortgage debt will remain the same or reduce, but the rents will, over time increase and thus your cash flow should strengthen, let alone the longer term appreciation of the capital value of your property.
Using a Ltd Company structure as a borrowing vehicle could help you out with this but it’s not a panacea so get some proper tax advice.
Buy to let mortgage rates are rising
NOT YET! Buy to let mortgage rates are at an all-time low – for now…
The Government subsidy known as the Funding for Lending Scheme that some lenders had been utilising, ended in January 2018, so at some point, expect those lenders to increase their rates as the cost of their own borrowing increases.
Fixed rates are typically based on the swap rate of the same term plus the lender’s operating margin. Despite small fluctuations, throughout the first half of this year, swaps have shown an upward curve although as yet, lenders have not passed on the cost to borrowers.
Tracker rates too, have remained pretty flat so far this year and for the most part are a tad cheaper than they were in 2017.
Bank Rate is never far from the headlines but it’s still at 0.5%. Speculation about when it might be raised continues to rise and fall like the tide. As of this week, many think it will be increased in August because the economic indicators are pointing in that direction. However, we are at the same point in the cycle as we were in May when a rise looked imminent too… and the MPC voted 7-2 against. Should it move on 9th August, fixed rates will jump if they haven’t already done so, as well as tracker rates linked to Bank Rate.
According to our research data, fees and charges on buy to let mortgage rates added only an average of 0.55% to the headline rate in Q2, that’s down from 0.57% in the previous quarter. Full details on this will be released in our Buy to Let Mortgage Index for Q2 2018 which is due to be published shortly. Do let us know if you would like to be emailed this index when it comes out.
There are some incredibly good rates to be had, but they are simply not available to everyone. I won’t start listing the sweet spots - my brokers are on hand to chat these through with you whenever you are ready. Be realistic; if your circumstances are complicated, expect to pay a bit more.
Guessing when rates will rise – and they will – is like playing a game of chicken. If you need to remortgage, don’t wait too long… And if you’re thinking of buying, get on with it.
What about EPCs, licensing, rogue landlord databases?
Yes, it does seem like the government has got it in for landlords. Why, when all the landlord has done is to step in to alleviate a housing crisis which successive governments have failed to fix? But not all landlords are like you! And buy to let is an asset like no other. There are plenty of rogues out there who don’t care about the state of the property or how many people live in it. If we are to ensure that rental properties are safe and habitable, then there have to be common standards against which properties and landlords can be measured. Rules and regulations can feel punitive but actually, if we look at the sentiment behind them - to bring the Private Rental Sector up to a consistently professional standard - that is something we should support.
We will let you know how the new EPC rules and soon-to-land HMO legislation will impact the way lenders view new buy to mortgage applications. Rest assured, our team is always on hand with a view, so do ask! (Or sign up to our Investor Update).
Don’t get me started! But I will just say this… Whether we are in or out, or somewhere in the middle, the demand for privately rented properties will continue to grow for years to come. There are not enough homes to go around. There are not enough new homes being built. And therein lies the opportunity. How that opportunity is manifested, is up to the landlord.
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