Shifting gears: New directions for mortgage brokers & specialist lenders
Following a myriad of changes over the past 24 months, first time buyers are in an extremely strong position following support through government schemes, the removal of stamp duty and a rising number of new products from lenders to provide assistance to those struggling to meet affordability requirements. The Government sees the new build sector as the saviour of the housing crisis, pledging to build 1 million new homes, including affordable housing for sale, rental and private purchase.
Buy to let on the other hand has turned completely the other way; stricter affordability assessments, higher taxation and an increase in stamp duty on second homes, has reduced the size of the market considerably. So, what can investors do to maximise their rental yield and most importantly how can Mortgage Brokers provide them with invaluable support to enable them to do this?
We’ve asked some of the best minds in the specialist lending business from Fleet Mortgages, Magellan Homeloans and Secure Trust Bank for their expert opinions.
New Build Growth
Housing Secretary, James Brokenshire, confirmed the government is funding residential housing developments across all tenures to the total of £44bn over the next five years. This equates to a huge 20% increase in additional funding coming to the new build market.
Needless to say, new build clearly therefore presents a huge growth opportunity for brokers and lenders in the coming years but do you feel there is a reluctance from both to get involved in this evolving niche market?
Esther Morley, Secure Trust Bank Mortgages: It has been clear for some time that government policy will, for the foreseeable future, promote the growth of new build as one solution to tackle the demand for housing. The sector therefore presents a growth opportunity for brokers and lenders, but new build does have its own considerations and it is important that businesses understand the dynamics of the market before getting involved.
A new build transaction will often proceed at a dual pace. Developers are naturally keen to secure a commitment to purchase as quickly as possible and, with multiple interested parties for some properties, speed of decision and processing at the front end is an important factor. However, with buyers often purchasing a home off-plan months before the building work is completed, there can be a significant wait between exchange of contracts and completion.
It is therefore important for lenders to tailor their processes to suit the unique dynamics of the new build market. At Secure Trust Bank, for example, we understand the need for a lender to balance efficiency and patience when it comes to new build, which is why our lending decisions are made by dedicated underwriters and we have a six-month offer period, with the potential for a further three-month extension.
For brokers, it’s important to understand which lenders they can trust to provide specialist service for their clients purchasing a new build property, so that they can recommend a solution in confidence that the lender will be able to take the right approach to secure their client a new home.
New Landlords Entering the Market
A recent report from Octopus Choice revealed that 56 per cent of buy to let investors want to keep or buy more properties, while 44 per cent intend to exit the market. Of those who want to sell their rental properties, 24 per cent blame failing yields, 23 per cent tax changes, and 19 per cent point to “cooling house prices”. However, long term growth in this sector seems likely as the average length of a tenancy continues to increase (current average is 22 months).
Do you think there will be a change in the type of new landlords entering the market over the next few years?
Andy Valvona, Fleet Mortgages: Many new landlords will be seeking to consider higher yielding properties in the next few years, than they may have considered in the past, as the tax changes start to bite, or may consider limited company structures in which to place their properties in. HMOs are the most likely to see growth in new landlords, as it is possible that some existing landlords captured by the new HMO licencing regulations resort to selling their properties.
There are also other types of property available which can achieve higher rental returns. These include HMOs which do not require a licence, (where a property is let to a maximum of 4 sharers in an area where the local council does not implement its discretionary or selective licencing powers). Fleet Mortgages allows landlords to let properties on this basis on our Standard and Limited Company range of products, whilst allowing multiple ASTs, locks on doors, and a valuation which assesses the rental income on a room by room basis. New landlords may also look at ex-local authority flats with deck/balcony access, which, in certain areas give a good opportunity for capital growth and high rental yields. Again, Fleet will consider these types of properties.
Simon Read, Magellan Homeloans: For some the changes have meant exiting the market altogether choosing to use other investment methods. Whilst experienced investors still see the inherent value that property offers over the long-term. One reason is the shortage of supply. Paradoxically, because some landlords were discouraged by the 2016 tax changes and slimmed down their portfolios, the ones who have held their nerve have realised that their properties can still command decent rents with demand remaining strong.
Whilst, over the past 20 years residential property in England and Wales has returned 9.5 per cent on average each year. This compares to the FTSE All Share Index at 6.5 per cent and the average five-year bond at 4.7 per cent. Of course, you can’t bank on property prices rising all the time, as there are periods when they fluctuate. Values also vary depending on where you are investing in the UK. But having said that, over the long-term, property investors have been onto a winner. Values are around 22% higher than 10 years ago, according to Zoopla data, and a whopping 254% higher than 20 years ago.
However, whilst holding true to property investments many are looking at new ways to adjust their portfolios and their approach so that they can still make money in today’s environment, including:
• Historically, London and South East has been a hotspot for property investment due to its high demand for rental property and the high capital growth opportunities. Additionally, many property investors have chosen to invest close to home because they understand the local market. However, it seems many property investors are stepping out of their comfort zone as there has been a growing trend towards investing in other regions of Britain where the costs to buy are less and the rental yields are higher;
• The type of lets is also shifting more towards investing in more complex property types such as houses in multiple occupation, where landlords let rooms out to individual tenants on separate rental agreements and thereby earn higher rents than on a single let. Some landlords have also begun to look at semi-commercial lets – a flat above a shop for example – which typically offer higher returns than pure residential lets. Other landlords are looking to diversify the types of tenants they will allow by moving into the higher risk, higher maintenance tenants such as AirBnB, student accommodation, state supported tenants, and corporate tenants;
• Increasing numbers of landlords are looking at ways to reduce their tax liabilities. This includes choosing to run their portfolios through a limited company, as well as bringing other family members into their property investment business to take advantage of shared tax rates.
The good news is that buy to let mortgage interest rates have almost halved in the last 5 years.
You will have to be very lucky to make a killing in the UK buy to let sector in the near future. The great thing about the property investors is their adaptability. Whilst some landlords fall by the wayside, others are learning how to weather the storm, to cash in during the good times. However, property investment has always been a long game for savvy landlords.
Rise of Limited Companies
Research from Precise Mortgages shows nearly two out of five landlords will use limited companies to buy properties over the next year compared to just over a quarter as individuals. Landlords operating in London or those with four or more properties are the most likely to be utilising a limited company structure.
How do you think this will shape the market over the next five years?
Andy Valvona, Fleet Mortgages: Limited company buy to let mortgages are highly likely to increase in popularity as long as there is a tax advantage available or landlords to consider this methodology. This is likely to see more lenders entering the sector, which is good news for brokers and landlords alike, as increased competition drives more competitive products, and product choice. The client should always seek independent taxation advice from a qualified practitioner before deciding on the structure of their buy to let business.
Simon Read, Magellan Homeloans: Since launching less than a month ago more than 65% of the business we have received is in limited company names. There is however the potential of the tax changes creating a two-tier market when interest rates rise, as limited company landlords will potentially only have to pass on the cost of the rate rises to tenants whilst higher rate tax owners in personal names will have to cope with the additional tax payable on any increases in rent.
Borrowers are obviously drawn to the most immediate benefits such as the income tax treatment. However, borrowers and their Mortgage Advisers need to be mindful that there are also tax disadvantages and additional costs to using a limited company and should always get specialist advice from an Accountant.
The Consequence of 5 Year Deals
Many landlords are struggling to take out 2 year or 3 year fixed products due to the tighter affordability calculations that were introduced by lenders in 2016. As a result, there has been an increase in 5 year fixed deals because landlords have been left with very few other options.
Do you think the buy to let market will therefore contract over the next 3 years following a surge in 5 year deals over the last 2 years?
Andy Valvona, Fleet Mortgages: Undoubtedly, a client on a 5 year buy to let product is less likely to remortgage within their ERC period, so a rise in this area of mortgage lending is almost certain to result in less remortgage business. However, not all lenders restrict affordability on sub 5 year mortgage products.
For example, some lenders allow top-slicing of income, although there is some debate as to how this might work on the client’s second and subsequent buy to let purchase when top-slicing of income is applied. Alternatively, Fleet Mortgages offers an ICR of 125% at 5% on many of its products, including sub 5 year deals. 125% at 5% allows a client to borrow up to 192 times the monthly rental income from the property. These products are available to all taxpayers and are not restricted to, for example, lower rate taxpayers.
Gap in the Market for Refurbishment Loans
Landlords continue to attempt to maximise their rental yield by being savvier about the types of properties they purchase with an increasing number taking on properties in need of renovation. This has created a gap in the market for more renovation loans which are currently only really being served by bridging lenders.
However, could buy to let lenders do more to help landlords refurbish then let a property?
Andy Valvona, Fleet Mortgages: This is certainly a growth area, as landlords are seeking to find higher yielding properties to let. Fleet Mortgages can offer day one remortgages, which allows a client to take advantage of any increase in value of their newly purchased buy to let property, by being able to remortgage the property at the market valuation, after significant works have been carried out.
For example, a landlord could purchase a property in need of renovation, using a bridging loan, or by paying cash, then arrange for the works to be completed in a short time frame. The client can then remortgage the property when it is ready to be let, repaying the bridge or replenishing their cash reserves whilst gearing up the property, leaving them with additional funds in order to move onto their next project.
New build presents a fantastic opportunity for Mortgage Brokers following Government investment and Theresa May’s recent announcement that the cap on how much Councils can borrow against their housing revenue account assets in order to build houses has been scrapped.
It is vital that Mortgage Brokers understand the differences in the processing of new build mortgages as buyers usually purchase a home off-plan months before the building work is completed. If there are delays during the building process then this can cause havoc as the buyer’s Mortgage Offer could fall through, therefore making it essential that Mortgage Brokers assess lender’s policies and carefully select lenders who offer extensions or some flexibility to provide a level of protection to the client.
Most industry experts have noticed landlords shifting towards high yielding investments, such as HMOs, multi-units, semi commercial properties and areas outside of London and the South East which are performing well. HMOs are likely to experience the most significant investment over the next 12 months due to some landlords choosing to sell-up following the introduction of the new HMO licencing regulations, creating space for experienced landlords to add to their portfolio or new investors to join the market.
A growing number of landlords are also switching to a limited company structure and thankfully an increasing number of lenders have followed suit, expanding into this area or repricing their products so there is less division between landlords purchasing through an individual name or through a company.