Here you can find all the latest news and updates from Property Hawk Mortgages.
According to a recent survey by specialist buy-to-let lender, Foundation Home Loans, many landlords are expecting to remortgage their buy-to-let properties within the next twelve months. The survey was taken by over 750 buy-to-let investors and it showed that 30 percent of those who responded are planning to remortgage in the next year.
The proportion of portfolio landlords looking to remortgage is most impressive with 43 percent saying that they would like to do this during the next 12 months.
The survey also showed that 30 per cent of those looking to refinance their properties want to release equity. This is clearly an opportune time for landlords to consider capital raising as property prices have been on the increase, giving buy-to-let investors more confidence in the sector.
With property prices on the rise, landlord clients may be able to access lower LTV mortgages at better rates and allow them to release more equity. Landlords may release equity from their portfolios for a variety of reasons and providing a deposit for further property purchases is still a common plan for those looking to grow their investment property business (despite Stamp Duty reverting to pre-Covid rates).
Another reason to be alert to the buy-to-let remortgaging opportunity is that many 5 year fixed rates will be maturing in the next 12 months, contributing to the upward trend for refinance cases. Some landlord clients may also be in a better position to obtain shorter term fixed rates as rents have reportedly been rising in most areas of the UK, allowing applicants to meet lender stress tests more easily.
Releasing equity in order to carry out home improvements is also a common theme. With more people now working from home due to Covid, projects such as a loft extension, self-contained annex or garden office can add value to a property and also increase the amount of space available for more flexible home working arrangements.
Landlords may also be using any void periods to make improvements to their rental properties or carry out essential repairs. There is also an incentive to raise capital for making energy efficiency improvements to rental properties and achieve a better EPC rating. Currently all rental properties must have an EPC rating of at least E, but there are government ambitions for the minimum standard to reach a rating of C or above by 2028.
Buy-to-let investors with an eye on the future are starting to carry out improvements such as installing insultation, upgrading boilers or replacing windows in order to achieve a higher rating. There has also been the emergence of ‘green mortgages’ for landlords, with lenders offering incentives or discounts for more energy efficient rental properties.
From July 1st the zero rate stamp duty threshold was reduced from £500,000 to £250,000 and on 1st October it will revert to £125,000, so there is still time for those purchasing properties to make some savings. Although buy-to-let property investors pay a 3 per cent surcharge, the stamp duty holiday has created a boost in rental property purchases over the last 18 months.
Despite the stamp duty incentive coming to an end, there are still strong drivers for landlords to maintain their portfolios and look for opportunities to make additional property purchases. Average rental yields across England and Wales remain strong and recent data published by Fleet Mortgages supports this.
According to the data, landlords benefited from an average rental yield of 5.6 per cent in the second quarter of 2021 with some interesting regional variations. Year on year, Yorkshire and Humberside had the biggest increase rental yield rising from 6.1 per cent to 7.2 per cent.
Although London has suffered during the pandemic with falling rents, it is likely to recover well once the capital city opens up more fully following the enduring lockdown measures.
For landlords seeking to remortgage, release equity or expand their portfolios, buy-to-let lenders in the marketplace continue to demonstrate their appetite to lend. Increased competition means that buy-to-let mortgages are keenly priced and there are now more options available at higher loan-to-values (LTV), particularly in the 80 per cent LTV bracket.
This bodes well for buy-to-let brokers who are looking to write more business with their landlord clients as there is a good choice of products for most scenarios. The complex buy-to-let mortgage market is also flourishing and specialist lenders are perhaps being used more than ever before, especially for cases that don’t fit with mainstream providers.
It also appears that complex buy-to-let lenders are in favour with the intermediary community according to recent research by Smart Money People. The research involved 597 brokers who were asked to rate 44 different mortgage lenders from across the industry.
The complex buy-to-let lenders included in the research were rated highest by brokers for flexibility with a score of 96 percent, followed by mainstream buy-to-let lenders with a score of 87 per cent. This underlines that within the buy-to-let mortgage sector, brokers value being able to deal with lenders that have a flexible approach to underwriting especially for more complicated cases.
However, the complex buy-to-let lenders only scored 67 per for their ease of use compare with 80 per cent for mainstream lenders. This is perhaps unsurprising as complex cases normally involve more thorough underwriting practices and have greater supporting evidence requirements.
Buy-to-let intermediaries can take confidence from a recent report from Hodge which showed that nearly three quarters (73 per cent) of portfolio landlords use a mortgage broker to arrange finance for their buy-to-let properties. Furthermore, 71 per cent of large portfolio landlords (£2m- £50m portfolio value) said that using a mortgage broker had saved them money.
This clearly highlights the value placed on buy-to-let mortgage brokers and an appreciation for the service they provide to their landlord clients.
Renting is cheaper despite rising rents
It was interesting to read about the recent report by Hamptons, the estate agents, which indicated that in the UK it is currently cheaper to rent than buy a property, making for some eye catching headlines.
The research showed that prior to the pandemic in March 2020, buyers purchasing with a 10 per cent deposit were better off on average by £102 per month, but in last month’s report private sector renters were better off by £71per month.
According to Hamptons, in early 2020 it was cheaper to buy than rent in every region of the UK, but now it is only cheaper to buy in four areas, the North East, North West, Yorkshire and Humber, and Scotland.
What is most impressive about these findings by Hamptons is that it is cheaper to rent despite the 7.1% increase in average rents over the last 12 months. This is mainly because there has been strong growth in house prices and the availability of more expensive higher loan-to-value mortgages have contributed to the cost of buying a residential property.
Unsurprisingly there are regional variations in the disparity between buying and renting. For example, the report found it was £108 cheaper per month to rent in the South West, £117 cheaper in the East and £251 cheaper in London.
London has been most significantly affected, exacerbated by the fall in tenant demand and rents during the pandemic. During the lockdown periods many university students moved back to their parents and the increasing number of people now working from home means they are less tied to the daily commute to an inner-city office. Some have now moved out of the capital city either temporarily or for the long term.
Another factor to consider has been the availability of mortgages for first time buyers. During the early days of the pandemic, lenders either increased prices or withdrew higher loan-to-value mortgages, making it difficult for those looking to buy their first home without a large deposit.
Mortgages for first time buyers
A year later, the mortgage market is recovering with more low deposit residential mortgages now available. In fact, according to Moneyfacts, 80 new products up to 95 per cent LTV were launched in May 2021, albeit there is still less choice and the average interest rate for 2 and 5year fixed rates is currently higher than before the pandemic.
Some applicants, even those with higher deposits, may also find it difficult to obtain a residential mortgage if they have been furloughed or experienced any credit issues during the pandemic.
Although the cost of getting a residential mortgage may return to pre-Covid levels at some point in the future, the current market conditions are beneficial for buy-to-let property investors in most areas of the UK as tenant demand remains strong.
There have also been reported increases in the levels of savings during the pandemic, so with interest rates on savings at an historic low, now could be an excellent time to consider investing in brick sand mortar. This may result in renewed interest from amateur landlords or an expansion of portfolios for seasoned buy-to-let investors.
Positivity in the marketplace
There has been plenty of positive movement in the buy-to-let sector in recent months which has been supported by numerous reports and surveys from different corners of the market.
Moneyfacts reported in late May that average buy-to-let mortgage rates have been on a downward trajectory and reached some of the lowest pricing since the beginning of the year. It calculated the average 2 year fixed rate across all LTVs was 2.95% compared with 3.05% in March. Only January 2021 had a lower average at 2.89% so far this year.
Clearly an average calculation does not show all price movements and some higher LTV products have increased, whereas the lowest 2 year fixed rate available via our brokerage at the time of writing is 1.19%. What it does show though is that there is healthy competition in the market and that lenders are constantly tweaking their product ranges to meet customer demand.
Rise in rents
There has also been news from Hamptons, the estate agents, of a rise in rents which may bode well for landlords. In its latest Lettings Index April 2021, Hamptons showed that average rents rose by 5.9% in Great Britain which was the fastest growth since January 2015. Paragon Bank also reported that during the first quarter of 2021 average rental yields across England and Wales were at 6 per cent, up from5.3 per cent in Q1 2020.
This is encouraging news for potential property investors looking at the prospects for buy-to-let, although the Lettings Index did show considerable regional variations, suggesting that landlords should investigate the rent expectations and tenant demand for the particular area they are looking to purchase property. To illustrate, the highest rental yields recorded in the Paragon Bank survey were in the South West (6.7 per cent) and the North East (6.6 per cent).
Not only are there positive signs in the buy-to-let sector for landlords, but it appears that mortgage brokers are also starting the feel more confident in the market. According to Paragon’s recent quarterly Financial Adviser Confidence Tracker, half of intermediaries polled expect to write more buy-to-let mortgage business during the coming year than in the past year, which is the highest level of confidence found since 2014.
It seems that the appetite of lenders is also strong, not only with competitive pricing being evident but also with the development of new product propositions and improving criteria. The specialist buy-to-let sector is certainly in a good state with a wide selection of providers for complex cases such as HMOs, multi-unit blocks, semi-commercial and limited company applications.
More niche lending areas such as for holiday lets are also improving, with Interbay and Paragon recently joining other lenders in this arena. Other good signs for buy-to-let brokers and their landlord clients is the return of the Precise top slicing proposition which allows applicants to use surplus portfolio rental income or earned disposable income to support their affordability assessment.
It is encouraging to see growing optimism across the dynamic buy-to-let sector and it is reasonable expect some growth in the overall level of buy-to-let lending in2021, as key drivers such as tenant demand, strong rents and the availability of finance, continue to support the private rental sector in the UK.
In recent years, the environmental issues affecting our planet have taken central stage in the media and many people have become more concerned with their own carbon footprint. There are many ways that individuals may modify their lifestyles in an attempt to help fight climate change and protect our home on Earth, such as switching to green energy suppliers, reducing international air travel, or using public transport and cycling to work.
There have also been incentives provided by the government by way of the Green Homes Grant scheme to help homeowners make their properties more energy efficient, although applications closed on 31 March 2021. This scheme was also available to residential landlords who may benefit from improving the EPC rating for the properties in their buy-to-let portfolios.
Since 2018, landlords have been required to comply with the ‘Minimum Level of Energy Efficiency’ standard which sets a minimum EPC rating of band E for residential rental properties. From April 1 2020, landlords are no longer able to let any properties that fail to meet this minimum standard and may face fines for non-compliance.
There have also been recommendations to government by the Climate Change Committee that all homes in the UK should have an EPC rating of at least C by the year 2028, so there is rising pressure to improve the energy efficiency of housing stock in the UK to help fight climate change.
There is clearly motivation for landlords to make improvements to the energy efficiency of their portfolio and it seems that some buy-to-let mortgage lenders are showing thei support for environmental concerns by offering incentives for properties with abetter energy performance rating.
Green mortgages for landlords
Paragon Bank recently launched a range of green buy-to-let mortgages for properties with an EPC rating from A to C. These products offer lower deposit options of 20 per cent (80per cent LTV) compared with a minimum deposit of 25 per cent (75 per cent LTV) for less energy efficient properties.
Paragon also offers a green further advance product to help landlords make improvements to properties with an EPC rating of D or below. Similarly, TMW is offering a green further advance product for making energy efficiency upgrades.
Other green buy-to-let options include Foundation Home Loans with a ‘Green Reward’ remortgage product for applications where sufficient energy improvements can be demonstrated; and Keystone Property Finance who launched a green buy-to-let mortgage in April, which offers a 15 basis point reduction off their core range for properties that are 5 years or older with an EPC rating of A to C.
As there are mounting efforts to improve the energy efficiency of the UK housing stock, landlords are playing their part either by choice or obligation. There may also be more pressure on lenders to ensure that properties on their mortgage books meet the new EPC requirements, so providing green mortgage incentives for energy efficiency upgrades makes sense for all parties involved.
It is approaching 5 years since the PRA regulations relating to rent stress tests and portfolio landlords came into effect in 2017. The significant changes to rent stress tests across the buy-to-let mortgage market meant that many landlords were unable to meet the new rental calculations for short term fixed rates, such as 2 or 3 year products.
The PRA regulations do not apply for fixed rates of 5 or more years, so landlords were often obliged to take out a longer term mortgage product. For this reason, the popularity of 5 year fixed rates has rocketed in recent years.
For portfolio landlords, defined as having 4 or more mortgaged buy-to-let properties, additional underwriting requirements were also introduced in 2017. Lenders are now required to stress test the applicant’s entire buy-to-let portfolio as part of their underwriting process, to ensure that it isn’t too highly leveraged. Portfolio customers may also be asked to provide business plans and cash flow forecasts to support their applications.
Due to the increasing regulations and tax changes applied to buy-to-let over the last 5 years or so, there has been talk in the sector, supported by research evidence, that some landlords have considered exiting the buy-to-let investment market or reducing the size of their portfolios.
However, for many professional portfolio landlords buy-to-let still makes sense, and for those with 5 year fixed rates that are approaching maturity, now could be a good time to look at refinancing options.
Portfolio landlords have a diverse range of mortgage needs depending on the property type, LTV requirements, age range, tax bracket, limited company status and a whole host of specific criteria points that lenders will look at when assessing a case. There are lenders in the market who have opted out of the portfolio landlord space, preferring to focus on more ‘vanilla’ customers. This means that professional property investors will often find themselves using more specialist buy-to-let mortgage providers, possibly with a lengthier application process and slower decision making as lenders now have more information to assess.
Some lenders have a limit on how many mortgages they will provide to customers or will only lend to landlords with a portfolio up to a specific size. Other lenders such as Paragon, Foundation and Landbay have large aggregate lending policies or no limit on the total number of properties in the applicant’s portfolio.
Buy-to-let lending policies vary enormously with no two lenders taking exactly the same approach. Some buy-to-let cases can be complex and broad technical knowledge is required by a specialist broker to find the best solution for their clients.
For portfolio landlords looking to remortgage one or more properties in their portfolio, there are some excellent rates available and there are usually solutions for all scenarios, even the most complex cases. Like-for-like remortgages where no capital raising is required are normally a straightforward option providing the portfolio application meets lender underwriting criteria.
If you are looking to release equity from their property, it is worth checking buy-to-let lending policies to ensure that the reason for capital raising is acceptable to the lender. Lenders normally allow capital raising for a further property purchase, but some may not accept paying tax bills or debt consolidation, while others will provide capital raising for any legal purpose.
In the recent Budget, the Chancellor announced that the stamp duty holiday will be extended by three months to June, with a further three month taper to the end of September. This will be welcome news for clients who are currently partway through the mortgage process, enabling them to complete without incurring additional costs. It is also likely to buoy up the housing market for another few months. However, it has been pointed out by numerous industry pundits that extending the deadline just delays the inevitable cliff edge for those that don’t complete in time, prolonging the current difficulties being experienced within the purchase market.
Surveyors and conveyancers are already dealing with significant backlogs so there are still calls for the stamp duty holiday to be phased out, rather than abruptly come to an end. It is also worth considering the potential efficiencies to be gained by lenders using desk top valuations to speed up the process, particularly for lower LTV and lower risk applications. This approach was taken by many lenders during the lockdown period when visual inspections were halted, so there is an argument for it to continue in certain circumstances if it would improve service levels.
In 2021, it is coming up to 5 years since the 2016 PRA regulations were introduced which caused a dramatic rise in the number of landlords choosing 5-year fixed rate products. This has lengthened the remortgage cycle for many landlords, but these products will start maturing in 2021, which means it could be an ideal time to review your existing buy-to-let mortgage and explore refinancing options.
It could also be the perfect opportunity for landlords to consider the benefits of capital raising on their buy-to-let properties, especially as there has been a considerable rise in house prices in the past year. The ONS House Price Index for December2020 showed that there had been an annual increase of 8.5%, the largest annual increase since October 2014. The average house price was recorded as £251,500.
Professional landlords may consider releasing equity from their properties to provide the deposit for further buy-to-let purchases, however many lenders accept capital raising for any legal purpose including home improvements.
The coronavirus pandemic has caused changes to the working lives of most people, with many more of us now working from home. This has led people to re-evaluate their housing needs or consider how best to configure their existing home to accommodate new working arrangements. A report by Indeed Ratedpeople.com showed that 55 percent of people are currently working from home and 50 per cent of those polled are planning to make some home improvements.
Projects such as a loft extension, self-contained annex or garden office can not only add value to a property, but also increase the amount of space available for those who anticipate more flexible home working arrangements to continue into the future beyond coronavirus. Some landlord clients may wish to raise capital on their buy-to-let property in order to improve their own home.
The size of the buy-to-let mortgage sector has been pretty stable over the last couple of years at around £36 billion. However, IMLA is forecasting an optimistic £283 billion for the total amount of mortgage lending in 2021 and some industry pundits are predicting growth in the buy-to-let sector, perhaps beyond £40 billion.
There are certainly reasons to support the continued viability of buy-to-let property as an attractive investment strategy, particularly in the current economic environment. With interest rates at near zero and the unpredictability of the stock market, the yields associated with tangible bricks and mortar are a serious contender.
The buy-to-let mortgage sector may also see new interest among larger mainstream lenders looking to widen their propositions with products that provide a good margin, so specialist lenders may experience some additional competition for market share.
All of this bodes well for landlords as lenders are demonstrating an appetite for business, providing an increasing number of products to choose from and widening criteria options to suit most buy-to-let mortgage requirements.
Buy-to-let finance has never been a one size fits all product. Some lenders focus primarily on ‘vanilla’ cases, whilst others such as Paragon Mortgages, Zephyr Homeloans or Foundation Home Loans have a more specialist proposition. What it does mean is that landlords from an ever-widening demographic make up the population of property investors in the UK.
Certainly, age is no barrier to residential property investment. For older landlords, those approaching retirement age or beyond, there is a wide range of lenders and products to choose from catering for most finance needs. There are providers with a maximum age at application of 75, 80, 90 and some with no maximum age requirement at all.
Buy-to-let property may also become more popular among the younger demographic and most buy-to-let lenders have a minimum age of 18 or 21, providing other lending criteria is met. Career expectations for young adults have changed considerably in recent years and the pandemic has inspired many to set up their own business ventures during lockdown.
A recent poll for ISP GoDaddy showed that 1 in 10 people in the 16-24 age bracket had set up their own businesses during the last year, and 1 in 5 have developed concrete plans to start up a new venture. With such entrepreneurial spirit being demonstrated by the younger generation, could buy-to-let property be an attractive option for those aspiring to have a self-employed lifestyle?
Being able to work from anywhere, travel and set your own work schedule is a potential perk of being a landlord, although it does take time and commitment to build up a property portfolio that provides a suitable income to become a professional landlord.
For people looking for an alternative to pensions, buy-to-let property is a worthy consideration for medium to long term investment at any age. Buy-to-let property is also a leveraged investment, with lenders typically offering 75 per cent loan-to-value on their product ranges, which is another good reason for its popularity.
During the last 12 months, with household spending being curtailed by the pandemic, there has been the opportunity for some to save up significant sums of money, which could provide the deposit for a first buy-to-let property or portfolio expansion for those already in the market.
There is certainly plenty of opportunity in the buy-to-let sector for landlords, so there is reason to be optimistic about your prospects this year.
What a year and such a challenge in 2020; it’s hard to put into words exactly what the impact of the coronavirus pandemic has been on our lives over the last 12 months. It has certainly brought a lot of change to our working lives and perhaps forced businesses to reassess some of the assumptions about best practices or develop new strategies for continuing to work effectively in a different set of circumstances.
From the perspective of a specialist in the buy-to-let mortgage market, the last year has highlighted the benefits to be gained by focusing on our technical capabilities and how improvements to our online processes can provide a more efficient service to customers. It also made us rethink our approach to team-working within the business.
To start with, everyone at Buy-to-let Direct was immediately asked to work from home at the beginning of the first lockdown in March. This was arranged remarkably quickly and without fuss, especially considering we have always been an office-based business. It meant that we all became remote workers and online conferencing took on a life of its own, with Microsoft Teams becoming our channel of choice.
Although this has required staff to adapt, it has also taught us new ways of communicating and allowed a more flexible approach to working, especially for those who have young children at home needing supervision during these unusual times.
Throughout the buy-to-let mortgage sector, we have seen an increase in the use of digital communications to maintain relationships between lenders, brokers and clients, which has highlighted the need for service providers to keep improving their online capabilities to meet the changing demands of customers.
In general, the demand for buy-to-let finance has remained high throughout the pandemic and once the housing market reopened after the initial shutdown, there has been a surge in buy-to-let mortgage business spurred on by the stamp duty holiday. Buy-to-let continues to be a viable investment opportunity, especially in a financial environment offering such low interest rates on savings.
During 2020, the continuing interest in limited company buy-to-let was apparent with a significant proportion of applications at Buy-to-let Direct being via a corporate entity. This is unsurprising given the buy-to-let mortgage interest tax relief was finally phased out in April 2020, and the high demand for limited company finance is likely to continue in 2021.
Coronavirus also brought an unexpected boon for the holiday let sector as more people opted for UK staycations and the demand soared for properties in popular resorts and other desirable locations. This has led to a wider range of products for investors to choose from as lenders have developed their propositions to service this niche sector.
It looks as though the uncertainty brought by Covid-19 in 2020 is likely to continue during the early part of 2021 and those working in the mortgage industry will have to remain flexible and open to change as we wait for situation to play out. However, there will be plenty of proactive ways to face the unknown challenges ahead and sometimes unexpected change can bring unexpected opportunities.
At Buy-to-let Direct, our main priority is maintaining good communications with our finance providers and landlord clients; harnessing technology to deliver a better service. We have also developed greater understanding of the challenges facing landlords, becoming better at empathising and looking for creative solutions to individual needs.
No doubt 2021 will be another interesting year in the buy-to-let sector and one that provides us with the opportunity to effect change – for the better.
After a successful e-petition, MPs are now scheduled to debate extending the stamp duty holiday on 1st February, so we eagerly await the outcome.
The stamp duty holiday announced in July 2020 for properties up to £500,000 in England provided a welcome boost to the housing market allowing it to make a recovery from the effects of the coronavirus pandemic. The cost saving incentive has certainly had an impact and resulted in increased activity in the purchase market, including buy-to-let properties.
However, the surge in mortgage applications is not without its problems, with some lenders being overwhelmed with new business and delays occurring with conveyancing work as solicitors try to deal with the increased demand on their services.
The deadline of 31st March 2021 when the stamp duty holiday is due to end means that time is running out for anyone looking to take advantage of it. Recent research by Legal and General Mortgage Club found that the average time for a property purchase, from finding a property to completion is taking at least 14 weeks as processing times have doubled due to the high demand.
At Buy-to-let Direct, we only deal with buy-to-let mortgage applications, but we have heard warnings from the home moving industry that some purchase transactions are taking up to 5 months to complete, which means that the window of opportunity of getting a mortgage for property purchases that avoid paying stamp duty may well be closed.
There has been concern throughout the industry that having a hard deadline for property purchases to complete may cause some transactions to fail at the last hurdle, especially as the current Help to Buy scheme is also due to end on 31st March.
For example, prospective first-time buyers may not have enough savings to cover the 3 per cent stamp duty charge if it was suddenly payable when they are due to exchange contracts on their new home. This could then cause a breakdown in the property chain, causing unintended but drastic knock-on effects in the housing market.
There have been calls by the home moving industry for the stamp duty holiday to be extended by another 6 months and to have a tapered ending to avoid creating a cliff edge scenario for buyers. This would then release the pressure on all parties involved in property purchase transactions and encourage the housing market to continue its recovery beyond the 31stMarch deadline.
Whatever happens with the stamp duty deadline, it is important for mortgage lenders and brokers to be supportive of each other during this period of increased demand for finance. It may seem sensible to submit cases to lenders as quickly as possible, but it is just as important to make sure that they are fully packaged, with all the required documentation, in order to ensure the application can be processed without unnecessary delays. Equally it is vital that lenders are transparent about their current turnaround times so that brokers and their clients have realistic expectations for offer and completion dates.
After all, we’re all in this together.
A month is a long time in the buy-to-let mortgage market, although Covid-19 has added a certain feeling of Groundhog Day to our lives due to the various government restrictions currently being applied around the UK.
However, the buy-to-let mortgage sector continues to evolve in reaction to market demands and the marketplace is as dynamic as ever with daily changes to product pricing and lending criteria.
Encouragingly the Stamp Duty holiday has had a noticeable positive effect on the buy-to-let purchase market as landlords seek to expand their portfolios while the cost saving measure is still in place. At Buy-to-let Direct, the level of purchase enquiries and applications has increased significantly since April 2020.
The boost to purchase activity is good for landlords and lenders, but some providers are dealing with the surge better than others. It seems apparent that those who have good IT systems and streamlined processes are able to handle the increased demand, but less well-equipped providers are struggling to maintain service standards. This clearly has a detrimental effect on the customer experience, causing frustration to everyone involved.
In the current coronavirus environment, landlord customers now expect a better online service from all parties to the mortgage application process, including being able to choose a product without the need for face-to-face meetings. Being able to upload supporting documents online is also a key advantage in terms of efficiency of service, so lenders without online facilities may lose out to the competition.
At Buy-to-let Direct, we have a dedicated buy-to-let mortgage sourcing system which includes an online application form. We have recently added an online declaration and the facility to upload documents directly which will increase our processing efficiency. BM Solutions also announced recently that it would be launching a new online application system in 2021 with improved document uploading and case tracking features.
If buy-to-let mortgage providers are to maintain good service levels, continual improvements to IT systems and processes are key to meeting the expectations of customers. The current environment is unusual and pent-up demand for properties is putting higher than normal pressure on lenders, however it is a good way to identify potential shortcomings and find solutions for giving a better service.
Outlook for the buy-to-let sector
Buy-to-let mortgage brokers are starting to feel more confident about the buy-to-let market as recent boosts to business give rise to some optimism. Paragon recently published its latest FACT index for quarter three, September 2020, which showed that nearly half of brokers (48 per cent) are seeing ‘strong demand’ for buy-to-let mortgages, up 22 per cent from June.
Nearly half of participants (49 per cent) expect to see more buy-to-let business in the next 12 months, up 8 per cent from June. Also, 89 per cent think that their business will be as strong or stronger than before the Covid-19 crisis, up 8 per cent from June.
It is good to see growing confidence among buy-to-let mortgage brokers, but elsewhere in the buy-to-let sector there is concern for the support being offered to tenants during this time. Although the furlough scheme has been extended to the end of March 2021, questions still arise over what further assistance tenants will receive if they are struggling to pay their rent and will landlords end up bearing the financial burden.
The National Residential Landlord Association (NRLA) has been campaigning for the Government to provide interest free, government guaranteed hardship fund loans for tenants in England to help them pay off Covid-19 related arrears. This type of scheme is already in place in Scotland and Wales. The NRLA also calls for landlords to be able to cover arrears by grants if tenants don’t take up a loan.
The impact of Covid-19 on the buy-to-let sector has been difficult for all parties involved, but there are indications that as the market recovers, confidence is growing and there is optimism for the future. However, there are still challenges to overcome before a real sense of normality returns.
There are encouraging signs in the buy-to-let market that it is making a recovery since the housing marketing opened up at the beginning of May with the return to visual inspections in England. Since then we have seen a flurry of activity from lenders as they reassess their buy-to-let mortgage propositions in response to greater demand and competition. This has resulted in more products being offered, better rates, higher LTVs,increased maximum loan sizes and many other criteria tweaks that reflect the growing confidence among both lenders and landlords.
There are other factors that have come about as a result of Covid-19 that may also help the buy-to-let sector to rebound and provide a boost to mortgage business for intermediaries. The temporary change to stamp duty on properties valued up to £500,000 was predicted to create a surge in buy-to-let purchase applications and there is evidence that this has started to happen since the measure was announced in July.
At our business, since the end of July, the percentage of enquiries about mortgages for buy-to-let purchases has risen to around 72 percent compared with just below 50 per cent during the month of June. This is a significant change and indicates a renewed level of purchase activity from landlords. A recent poll carried out by Cherry, a mortgage adviser forum, showed that over half of brokers had experienced increased buy-to-let business with nearly 30 per cent reporting an increase in individual purchases and 27 percent reporting an increase in limited company purchases.
There is clearly a pent-up demand from landlords who may see now as the perfect time to expand their portfolios and take advantage of good opportunities with more properties available on the market and vendors eager to make a deal. The pandemic situation has also curbed people’s spending and provided an opportunity to save over the last 5-6 months, savings which could now be used as deposits for new property investments. With savings rates so low – around 40 per cent of easy access accounts are earning 0.1 percent or less - investing in property may be an even more attractive option; Halifax reported an average rise in property values of 1.6% in the month of July.
As the coronavirus remains in the UK and as the economy tries to recover, the number of income and job losses has been staggering and the damaging effect on many people’s livelihoods is hard to witness. It is difficult to predict how the next 6 months will unfold and what new job opportunities will develop for those looking for work. It may result in people becoming more mobile and perhaps relocating to new areas to gain employment. This could increase demand for rental accommodation from new tenants including those who don’t want to commit to purchasing property in a different area.
Covid-19 has had a dramatic effect on UK workplaces with an increasing number of staff working from home. This trend may become the new norm as businesses recognise the potential benefits of home working. This may also impact on the type of properties that tenants require – perhaps seeking extra rooms to accommodate a home office.
What is clear is that as we recover from the impact of the pandemic, tenant demand for rental property remains strong and that landlords are keen to grow their property businesses.
Chancellor Rishi Sunak unveiled a range of packages to help the economy in his Summer Statement in July, with particular support for the housing market. Two elements will be of particular interest to landlords – a Stamp Duty Land Tax reduction and new Green Homes Grants for home improvements.
Let’s look at the implications of both.
Stamp Duty Land Tax
The Chancellor announced that he was raising the Stamp Duty threshold on residential property transactions from £125,000 to £500,000. This will run from 8 July 2020 to 31 March 2021 and means that home buyers purchasing a property up to £500,000 will pay no Stamp Duty.
For buy-to-let landlords, the 3% surcharge introduced in April 2016 remains, so whilst they will see their Stamp Duty bills reduced, it’s not as good news for homebuyers.
Before, landlords would pay 3% SDLT up to £125,000 of the property’s value, 5% between £125,000 and 8% between £250,000 and £925,000. Between now and 31 March next year, landlords will pay a flat 3% of the transaction value up to the £500,000 threshold.
Our analysis shows that this will typically benefit those landlords in Southern regions more as property prices are higher in those regions, particularly London and the South East.
Prior to the Chancellor’s Stamp Duty announcement on July 8, a landlord buying a property in the North West at Paragon’s 2019 average property price of £170,191 would pay £6,009 in Stamp Duty. A landlord in London buying a property at the average price of £578,167 would pay £36,253.
Following the Chancellor’s Stamp Duty holiday, the North West landlord’s Stamp Duty cost reduces to £5,105, with the London landlord’s tax bill falling by £15,000.
Hamptons International has calculated that the average SDLT bill paid by buy-to-let investors across England will fall from £7,120 to £2,400, a reduction of 66%.
Green Homes Grants
The Chancellor also unveiled a scheme to help homeowners and landlords improve the energy efficiency of their homes and support the UK to become carbon neutral by 2050.
The Government will introduce a £2 billion Green Homes Grant, providing at least £2 for every £1 homeowners and landlords spend to make their homes more energy efficient, up to £5,000 per household.
For those on the lowest incomes, the scheme will fully fund energy efficiency measures of up to £10,000 per household. In total, ministers say this could support over 100,000 green jobs and help strengthen a supply chain that will be vital for meeting our target of net zero greenhouse gas emissions by 2050. The scheme aims to upgrade over 600,000 homes across England, saving households hundreds of pounds per year on their energy bills.
The Green Homes Grant will cover a variety of energy saving home improvements. Whilst a comprehensive list has not been released just yet, some of the confirmed improvements are wall and roof insulation and double glazing.
Although full details have yet to be released by the Treasury, applications are expected to be open from September.
A month is a long time in the buy-to-let mortgage market, which has always been a dynamic sector that continually changes in line with social, political and economic factors. The big news for landlords in July was the announcement of the stamp duty cut in England for properties valued up to £500,000.
This measure introduced by the government to help stimulate the housing market was also extended to buy-to-let properties, which could really encourage landlords to start actively seeking to expand their portfolios again. Although the 3 per cent surcharge for second homes is still applicable, buy-to-let investors would previously have paid 5 per cent stamp duty for properties up to £500,000, so there are big savings to be made while this incentive is in place.
As the government seeks ways to kick-start the housing market, it is also providing Green Home Grants to homeowners to help them make their homes more energy efficient. Once the scheme is launched in September, vouchers of up to £5000 can be applied for to help cover the cost of insulation and double glazing.
While businesses around the UK start to open up again, lenders are also returning to a more ‘business as usual’ approach to buy-to-let finance. There has been a flurry of activity over the last month, with lenders re-evaluating their lending policies and re-pricing their product ranges as competition increases in the marketplace. This is creating a downward pressure on mortgage rates, resulting in better deals for landlord customers.
Lenders are returning to more specialist areas of lending such as for HMOs and limited company applications with a wider range of products now available. Lenders such as Leeds and Hampshire Trust Bank are also offering products for holidays lets again, which presumably follows on from the opening up of these businesses around the UK. Some lenders may hold off returning to this niche sector while there is still the possibility of a Covid-19 second wave, but with the growing popularity of staycations in the UK, the market for holiday lets looks promising.
In support of landlords during the coronavirus pandemic, some lenders will take account of furloughed income when assessing the affordability of buy-to-let mortgage applicants. However, lenders may not take such a lenient view of applicants who have applied for a buy-to-let mortgage holiday during the crisis as this could be interpreted as demonstrating underlying cash flow issues with management of the property.
Although still in a state of flux, the buy-to-let mortgage market is continuing to recover and there have been many positive changes in recent weeks. With our knowledge and expertise, we aim to help you find the perfect buy-to-let mortgage.
The UK housing market has opened up since the end of May, with visual inspections resuming albeit more quickly in England. This means that buy-to-let mortage lenders are also returning to a more normal approach to business. However, the recovery of the market will take time.
Positive improvements in the marketplace have seen many lenders launching new product ranges, offering higher loan-to-values (LTVs) particularly in the 75 per cent LTV bracket, providing more options for landlords. However, there is still a lack of competition in the 80 per cent LTV bracket which could create difficulties for landlords who are more highly leveraged when looking to remortgage.
Now that physical valuations can be carried out, some lenders have returned to more complex lending such as on HMOs, multi-unit blocks and limited company applications. Foundation Home Loans recently launched a selection of packager exclusives for standard and large HMOs which are available through selected partners including ourselves. However, it was disappointing to see Barclays withdraw from both multi-unit and limited company lending.
There are also competitively priced buy-to-let mortgages available for standard properties from high street lenders and some excellent product transfer rates for existing customers, including a 1 per cent 1-year fixed rate currently being offered by TMW.
It is likely that the marketplace will continue to develop in the coming weeks as more lenders respond to the new normal and we may see more options in niche areas of lending such as for holiday let properties.
There has been a fair amount of concern about the impact of coronavirus on the ability of tenants to pay rent during the crisis and the effect this could have on landlords. Given the government ban on starting the eviction process before the end of August, some pundits predicted that there could be a surge in eviction applications post-Covid-19. However, a poll commissioned by the RNLA questioned over 2000 tenants and 90 per cent had been paying their rent as usual, which suggests that a concern over a spike in evictions could be unfounded. 84 per cent had not needed any support from their landlord, and of those that did three quarters received a positive outcome.
Even though this report paints a good picture,there are some landlords having trouble collecting rent for their properties who have applied for a mortgage holiday with their buy-to-let lender. This may provide a short-term solution, but how will it affect a landlord’s ability to access finance post-coronavirus?
Although applying for a mortgage holiday will not affect a customer’s credit file, lenders may reasonably ask why it was needed.As they assess the risk of lending to an applicant, lenders will want reassurance that there aren’t any existing financial issues with the property, portfolio or business in question. This may make it more complicated for those who have taken a mortgage holiday when they seek further finance, but it remains to be seen how this will play out.
As the UK housing market gains momentum, landlords may be looking for their next opportunity to expand their portfolio and considering the most cost-effective way of doing this. There have been questions around whether landlords who run their property business via a limited company could use the government-backed Bounce Back Loan Scheme to fund further property purchases.
Small businesses can apply for up to £50,000 with no interest to pay for the first 12 months, after which the interest rate is 2.5 per cent. This could seem like a relatively cheap way to raise a deposit;however, lenders do not normally accept loans as a source of deposit and using the BBLS to profit from further property purchases is not the intention of the scheme.
Overall, the buy-to-let mortage market is making a steady recovery and this is likely to continue in the coming weeks and months, providing more options for landlord clients.
Over the last couple of months there have been many conversations around the onus on students to pay rent for university accommodation during the coronavirus lockdown when they have returned home to live with their parents and are no longer using the property and facilities provided. It is a legitimate issue and most people can empathise with students facing this dilemma.
For students in university owned accommodation, many have had their rent and related fees suspended whilst the university is closed, however the scenario is more complex for those living in private rented property.
Tenants in privately owned accommodation are still required to pay their rent in accordance with the contract they have with the landlord. Some tenants were under the impression that because landlords were entitled to apply for a 3-month mortgage holiday on their buy-to-let properties, that they wouldn’t have to pay rent. This is not the case and tenants are still required to fulfill their obligations where they can.
A lot of landlords have been demonstrating support towards their tenants during this period and have been keen to find solutions that work for both parties. Although it is right to support the concerns of those who are no longer living in their student digs or struggling to pay rent due to the impact of Covid-19, it is important to also remember that most landlords depend on their rental incomes to support their own livelihoods.
The National Residential Landlord Association (NRLA) has recently conducted a survey of 4500 landlords which shows how tenants facing financial difficulties are being “supported by landlords willing to take a temporary financial hit.”
In the survey, 44 per cent of landlords have been asked for help by their tenants and 90 per cent of those asked had been able to provide it. The type of help been offered included rent deferrals, rent reductions, rent-free periods, early release from tenancies and refunds on HMO service charges.
The survey also shows that 54 per cent of landlords were experiencing issues with tenants paying rents or unexpected voids. Of those dealing with tenants falling into arrears, 60 per cent had lost at least a month’s rent.
This data clearly demonstrates the impact that the crisis is having on landlords and that they are doing what they can to support their tenants during this unprecedented period.
There may be further concerns for landlords who rent to students, especially those who normally provide HMO accommodation to serve the sector. Cambridge University recently announced that it would be running all its lectures online for the next academic year and other further education institutions are likely to consider similar approaches to delivering their courses.
The result of having lectures delivered online and maintaining social distancing measures will impact on the whole university experience that students normally enjoy, so the further education sector is likely to report a reduction in student admissions during the 2020/2021 academic year particularly from international candidates.
This gives rise to the question of how the demand for student accommodation will be impacted if fewer students are required to live near campus to attend lectures. It also leads to questions about whether landlords will move away from the student sector to focus on single family lets or professionals sharing properties, leaving a shortage in supply for those who do seek student accommodation.
It is difficult to predict with so many unknowns, but for those landlords already experiencing rental voids due to Covid-19 repercussions it is certainly something to contemplate, especially for those who own student HMOs. In a lot of cases, it may be financially untenable to convert HMOs back to a single family let as it is likely to devalue the property considerably. However, there is a growing trend for professional sharers opting to reduce their rent expenditure by living with others, especially at the start of their careers. Some HMO landlords may simply shift their focus onto this area of the rental market.
It is important that landlords feel confident to remain in the buy-to-let sector as we ease out of lockdown and start to recover from the impact of coronavirus. If too many decide to leave, it will only further fuel the housing crisis leaving more tenants chasing fewer properties.
The opening up of the UK housing market, including the lettings market, has been welcomed by landlords as the lockdown measures are easing and visual inspections are resuming. The government has published guidelines on how to undertake the various stages in the letting process such as viewings, safety inspections and tenancy check-ins. This should kick start the buy-to-let sector and there may be some good opportunities for landlords to expand their portfolios, especially if some sellers are keen to move quickly.
The buy-to-let mortgage market, unsurprisingly, has experienced significant turbulence since the beginning of the coronavirus lockdown which has meant that the profile of lenders and products available to landlords has changed.
To begin with some lenders have withdrawn from the market, a number of these (typically non-banks) should be temporary as they wait for funding lines to become available, but there may also be long term casualties who are unable to return to buy-to-let lending post-crisis.
The overall number of buy-to-let mortgage products has dropped markedly, with Moneyfacts reporting that 1304 products had been taken off during March with changes continuing throughout April and into May. It was reported that 5-year fixed rates took the biggest hit, followed by 2-year fixed rates.
Some lenders have also responded to the crisis by reducing their maximum loan-to-values, resulting in a significant dent to the 80 per cent LTV market and the removal of 85 per cent options. This may cause challenges for buy-to-let clients with more highly leveraged properties when they are looking to remortgage and deter those without high deposits from making purchases.
We have also seen lenders modifying their lending criteria, especially in the complex buy-to-let sector, which may allow the remaining specialist lenders offering, for example, finance for HMOs, limited companies and multi-unit blocks, to take a large slice of the pie.
Interest rates have increased on several ranges which will be disappointing to landlords, especially as the mortgage interest tax relief scheme for buy-to-let properties was finally phased out in April, creating additional costs to many rental property businesses. However, there are still competitive rates to be found.
The fact that the country is in lockdown has meant that visual property inspections are no longer possible and for this reason some lenders have suspended offering new purchase finance. However, there are a growing number of providers who have switched to using desktop valuations or AVMs during this unprecedented time, to allow business to continue.
The government has advised against house moves during the crisis period which has slowed the housing market and impacted on buy-to-let purchase transactions. However, it does mean that there is likely to be a pent-up demand for buy-to-let finance once lockdown measures are lifted and movement in the market is resumed.
This is obviously a challenging time for everyone in the buy-to-let sector, but also a time when landlord clients can benefit from the support of a buy-to-let mortgage expert. Being able to answer questions about the availability of finance or other relevant issues, such as buy-to-let mortgage holidays(available for both personal name and limited company mortgages), may be invaluable to landlords during these unprecedented times.
Many landlords could save themselves money by remortgaging, so it is also worth reviewing the whole property portfolio during this period. There may be options to release some equity which could help ease the pressure on buy-to-let businesses in the current circumstances.
At our business, we are paying particular attention to remortgage business as many of our clients have mortgages coming to the end of their initial rates during the next couple of months. There are still plenty of options to choose from and solutions to be found for most scenarios, which is where having buy-to-let expertise comes to the fore.
As everyone in the UK is adjusting to the societal changes being imposed on citizens due to COVID-19, landlords will also be considering the financial impact on their buy-to-let businesses. The Government has announced emergency legislation providing protection for renters meaning landlords cannot start eviction proceedings for at least a three-month period during the national crisis. These measures are designed to protect tenants who are struggling to pay their rent and prevent people from becoming homeless during this unsettling time.
There is also protection for landlords whereby lenders may offer a three-month mortgage holiday for landlords whose tenants are experiencing financial difficulties as a result of the coronavirus. The measure will be welcomed by landlord organisations such as the NLA and RLA who have asked the Government to be supportive of landlords. However, there doesn’t appear to be any specific help for landlords who don’t have mortgages but may also suffer financially during this period.
The NLA and RLA also issued a joint statement encouraging landlords to be supportive towards their tenants: “Landlords should be as flexible as they can to help tenants facing payment difficulties resulting from the impact of the coronavirus.”
The coronavirus crisis coincides with the final removal of mortgage interest tax relief for landlords which has been phased out in stages since 2016. This has impacted higher rate taxpayers most of all and may push previous basic rate tax payers into the 40 per cent banding. No doubt all landlords are concerned about the financial consequences of coronavirus over the coming months.
Section 21 and removal of ASTs
Since last year, UK landlords have been campaigning against the abolition of Section 21 which currently allows landlords to apply through the courts for a no-fault eviction should they wish to take possession of their property for any reason. Section 21 is still expected to be scrapped although the exact timeline is unclear, but it will leave landlords only able to end a tenancy where they can prove they have legitimate grounds under Section 8 of the Housing Act. A Section 8 claim involves a formal court hearing and the median time for this process to complete is 16 weeks, so landlords are asking for legal proceedings through the courts to become more efficient.
In tandem with abolishing section 21, the Government is also planning to remove the Assured Shorthold Tenancy (AST) which would mean that assured tenancies are the only type of tenancy available to landlords. At buy-to-let finance meetings with landlord groups around the UK that we have attended, landlords have been asking how the removal of ASTs will impact buy-to-let lending criteria? So far there has been little indication from lenders as to how they will react to this change in the rental sector, but it would be good to have an idea.
Although the various changes in the buy-to-let sector over the last 5 years have resulted in some landlords selling up, there has been little sign of larger portfolio landlords looking to exit the market in significant numbers. A recent survey by Moore, the accountants, shows that the number of landlords with a portfolio of 10 or more properties has remained constant over the last couple of years at around 43,000. This seems to show the underlying strength of the PRS in the UK and indicates that many buy-to-let investors look at it as a long-term prospect.
Larger professional landlords may be better able to adapt to changing circumstances with a more diverse portfolio and look at other options for higher yielding properties, such a HMOs or multi-unit blocks. They may also look at geographic regions further afield to take advantage of better performing areas of rental accommodation.
Certainly, at our business we are experiencing a continuing demand for more specialist mortgage products that are aimed at complex property scenarios and professional landlords with expanding portfolios. The experienced buy-to-let investors we talk to are often surprised that more lenders don’t provide mortgages to larger portfolio landlords as they perceive themselves to be a better risk than someone with 3 or less properties and are often irked if they have to pay higher rates.
It is difficult to look too far ahead as we are all currently experiencing unprecedented events and it is unclear how long emergency measures will be in place in UK. However, it is also an opportunity for showing solidarity and support for each other, including the landlord community.
There has been a swathe of tax and regulatory changes impacting on the buy-to-let sector in recent years which may have affected the perception of residential rental property and its viability as an investment option. Consequently, the sector has seen a reduction in the number of amateur landlords and it is now primarily the domain of professional property investors. However, there are still people entering the market and looking to make their first buy-to-let purchases – a group referred to as ‘first time landlords’.
Most lenders on our panel will accept applications from first time landlords providing they are currently an owner occupier, so there are plenty of product options in the marketplace. There is often a requirement that applicants have owned their residential home for a minimum length of time which may vary from 6 to 12 months, although some lenders do not state a minimum period providing the applicant’s name is on the title deeds.
It is not quite as straightforward for first time buyers - those with no existing UK property at all. We currently have around fifteen lenders on panel who will consider applicants without a history of property ownership such as Barclays, Landbay, Precise and Vida Homeloans. Some lenders will apply an affordability calculation alongside their normal rental stress tests and criteria, which depending on income multiples may limit the amount applicants can borrow.
There are also options for first time buyers to be the second applicant on a buy-to-let mortgage and it is a familiar scenario when parents help their children onto the property ladder in this way. Lenders who consider this include Interbay, Leeds Building Society and Paragon.
In recent years, we have seen a significant increase in the number of limited company applications, especially since the phasing out of mortgage interest tax relief for buy-to-let properties. We have also seen first time landlords setting up an SPV for their initial property purchases, which is definitely an option worth considering as it may provide financial benefits depending on individual circumstances. It is always recommended to seek professional tax advice before deciding about this option.
It is simple and inexpensive to set up an SPV, but it is important to register the company with an appropriate SIC code relating to the letting and management of property. Most lenders will accept brand new SPVs with no accounts history, but they will require personal guarantees from the directors/shareholders. There are also lenders that accept companies that trade in non-property related businesses, although the product options for this scenario are fewer.
A significant advantage of using a corporate entity when applying for a buy-to-let mortgage is that they are not affected by the recent tax relief changes or the 2017 PRA regulations relating to rent stress tests. Lenders normally apply a less stringent rental calculation for limited companies, typically at around 125 per cent at 5.5 per cent which may increase maximum borrowing levels for new landlords.
Those investing in buy-to-let property should give proper consideration to property type, tenant demand, location and rental income. These variables can have a significant effect on the overall profitability of an investment and prospective landlords will surely benefit from thorough research. For example, we get frequent enquiries about HMOs and multi-unit properties which often give a better than average rental yield due to multiple rents being charged.
Unfortunately for first time landlords most of the specialist lenders who finance HMOs and multi-unit properties require a minimum amount of previous experience as a landlord. For example, Vida Homeloans requires 12 months’ experience and Paragon Mortgages requires 3 years. However, there are a few options such as Masthaven, Kent Reliance and Together who will consider this scenario for first time landlords.
To conclude, there are plenty of investment opportunities for first time landlords and a wide range of buy-to-let mortgage products to choose from. By considering the different factors that may affect the level of finance available and overall returns on a property, new landlords can make more informed choices during their first buy-to-let investment experience.
As the end of the financial year approaches, buy-to-let investors will be mindful that mortgage interest tax relief will be phased out completely in April. The effects of this tax change have been implemented in stages over the last three years, giving landlords the chance to plan and adapt to its financial consequences.
The significant rise in limited company buy-to-let mortgages is a clear indicator that many landlords are considering the tax advantages of using a corporate structure for their property investment businesses. Around 35 per cent of our applications are currently for limited companies and we are frequently asked by landlords whether or not it is a good option for them.
This is not a question we can readily answer as the financial implications of using a limited company will vary depending on individual circumstances and portfolio size. We always recommend seeking tax advice, but we can also provide information that could assist in the decision-making process. For example, if a landlord client is seriously weighing up the benefits of setting up an SPV, providing mortgage illustrations for both personal name and limited company products could help calculate the overall cost savings involved.
Historically, limited company finance has tended to be more expensive than personal name finance although the gap is narrowing, and some lenders no longer distinguish between the two applicant types. In any case, it can be useful for landlords to be able to compare potential monthly repayments when deciding which route to take. Our online mortgage finder has a simple built-in filter for limited company products enabling visitors to obtain comparable mortgage illustrations without entering a complete fact find.
(NLA Landlords Tax course link - https://landlords.org.uk/landlord-tax)
It is difficult to predict what effect the current political and economic climate will have on interest rates in 2020 as Mark Carney prepares for his departure from the Bank of England and Andrew Bailey gets ready to step in.
It has also been predicted by industry pundits that the buy-to-let remortgage market will slow in 2020 as more landlords are choosing 5-year fixed rates which lengthens the remortgage cycle. However, mortgage rates are still very low and now could be a good time for landlords to examine their whole portfolio to make the most of these deals.
If landlords start to feel more confident about the UK economy in the coming months and are considering expanding their portfolios, releasing equity from existing properties is a popular way of providing a deposit for a new property purchase. There are plenty of options to choose from for all property types and situations, including many that come with incentives such as a free valuation and free legal fees.
For clients looking for a like-for-like remortgage, switching lender is not the only way to secure a lower rate. There is now a growing number of lenders who offer retention products to existing customers which can provide a quick and easy way to refinance.
It is expected that gross buy-to-let lending in 2019 will be recorded at around £37 billion but what are the prospects for this sector in 2020?
Some industry pundits have suggested that buy-to-let lending may fall slightly during the coming twelve months as the relatively buoyant remortgage market in 2019 begins to slow; more landlords are now choosing 5-year fixed rates rather than shorter term products which is lengthening the remortgage cycle.
The trend for longer term fixes was stimulated by the 2017 PRA regulations impacting affordability assessments and rent stress tests. For our buy-to-let mortgage business, over fifty per cent of applications were for 5-year fixed rates in 2019.
The purchase market was sluggish in 2019, due in part to the reticence among professional landlords caused by the uncertainty surrounding Brexit. However, following the general election in December and the success of Boris Johnson’s ‘Let’s get Brexit done’ campaign, the path ahead seems clearer; we are definitely leaving the EU.
Now that the political furore of 2019 has abated, there may be a boost to the buy-to-let sector as portfolio landlords release a pent-up demand for new property investment and begin resurgence in the appetite for purchase finance.
It is certainly a good time to obtain buy-to-let finance as strong competition in the marketplace has led to prices being driven down, with rates currently below 1.50 per cent with some High Street lenders, but rates may have bottomed out.
There is still economic uncertainty in the UK as we endeavour to leave the EU in the best possible circumstances and until the new Governor of the Bank of England is in situ. Depending on Brexit developments and other socio-economic factors, there could be some movement in interest rates in the coming year, although a difficult thing to predict without a crystal ball.
What does seem clear is that lenders have a strong appetite for buy-to-let business and some have adapted their lending criteria to widen their appeal to landlords. For example, there are now more lenders offering buy-to-let finance for expats, limited companies, HMO landlords and AirBnB.
This trend is likely to continue in 2020 with lenders modifying their propositions as the demand for more specialist or ‘complex’ buy-to-let mortgages continues. Recently published figures from UK Finance for buy-to-let lending in 2018 indicated that specialist lenders recorded higher rates of growth compared to banks and building societies.
However, following the PRA regulations relating to ‘professional landlords’ (those with 4 or more mortgaged buy-to-let properties), there is still a divide between those lenders servicing large property portfolio investors and those opting to limit their offering to smaller scale landlords. This is likely to remain the case in 2020, with lenders deciding on their target market and honing their propositions accordingly.
Pretty shortly, the general election results will be known and there maybe a clearer picture of how Brexit is going to be delivered. Alternatively, there could be further delays and more confusion surrounding the final outcome for the UK.
Political party manifestos often contain starkly different promises on key issues and it’s probably safe to assume that the election winner will not deliver all of them. It is difficult to predict what effect there will be on the economy and whether any significant tax changes will be implemented in 2020.
Regardless of the party in power, the UK will probably still be a viable option for foreign property investors, especially if the weakened pound persists during the next phase of Brexit. The property market in Britain has always attracted overseas investment and is also a popular investment strategy for British expatriates living abroad.
We frequently receive enquiries for expat buy-to-let mortgages and over the last 12 months there has been an increase in the number of lenders and products available for UK citizens living overseas. In fact, we have over 20 buy-to-let providers on our lender panel offering financial solutions for expats.
Due to the myriad of options available, buy-to-let expat cases can be relatively straightforward to place. However, there are some key criteria points worth being aware of when arranging expat finance.
Although a rather obvious place to start, country of residence is an important factor when assessing the product options available. Most lenders will accept any EEA country, others will include any that are on the FAFT list, and some lenders publish a specific list indicating the countries they will or won’t lend to. It is quite surprising how many places in the world are acceptable residencies for expat applicants, however the majority of our expat clients live in the EU, USA, Hong Kong or Singapore.
Most lenders will require applicants to have a UK bank account and an existing property in the UK (either residential or buy-to-let). As some expats sell their residential property before moving abroad this can be a stumbling block, however there are a few lenders who will consider applicants without a UK property including Saffron Building Society and Skipton International.
Expat lenders usually have specific requirements around employment status, preferring applicants who work for a multi-national company with a higher minimum income threshold, for example, £40,000 for The Mortgage Lender or £50,000 for Interbay. Self-employment income requirements are sometimes higher still.
Minimum loan sizes can also be an issue with expat buy-to-let cases as the threshold is usually between £100,000 and £150,000 with most lenders. However, Saffron Building Society is one of our most popular expat lenders with a minimum loan size of £30,000, neither a minimum income requirement or any specific restrictions on country of residence.
Another competitive provider in the expat space is Foundation Home Loans offering some of the most attractive rates in the market, but they will only accept limited company applications. Keystone products are also priced keenly,and they will accept both personal name and limited company applications.
Our free online buy-to-let sourcing system has a built-in search filter for expat mortgages and is a useful tool for brokers to use when researching the market for the best expat deals. Although there is normally a premium to pay for expat finance, we have hundreds of options to choose from currently starting at 2.49 per cent.
Expat buy-to-let mortgages aren’t necessarily more difficult to arrange but asking the right questions at the outset can help save time.
The buy-to-let mortgage market has come under pressure in recent years due to the multitude of tax and regulatory changes aimed at the sector. However, lenders are demonstrating their willingness to support landlords with a strong appetite for business and a renewed sense of innovation from some providers.
There are more lenders and products available now than there has been in the last ten years and a healthy competition is playing out among them, which means that there are some excellent deals for buy-to-let clients.
Lenders are not just competing on price though. Some are looking at ways to meet more specific requirements that result from the varying demands of landlords. For example, there is a good choice of lenders who offer top-slicing, or rental top up, facilities to support applicants who may fall short of the more stringent rent stress tests in the current marketplace, but who can comfortably afford the monthly payments with surplus earned income.
There are now more than 10 lenders on the our lender panel who offer a top slicing facility, including the likes of Hinckley & Rugby Building Society, Axis Bank and Precise Mortgages. These schemes are targeted at landlords with surplus earned incomes to support their affordability assessment, however our most popular lenders are still those without any minimum income requirement such as Vida Homeloans, Foundation Home Loans and Zephyr Homeloans.
We are also seeing lenders launching special offers with unique schemes that sit outside of their normal product ranges. For example, Foundation Home Loans have recently released an early remortgage special for landlords looking to refinance within 6 months of purchase which is proving popular. There are 2-year and 5-year fixed options which are now available to portfolio and non-portfolio clients.
Foundation Home Loans also have some “ERC 3” products which are 5-year fixed rates that only have Early Repayment Charges for 3 years and could be an attractive option for landlords who may need to refinance before the fixed term is up. It is worth being aware of these schemes as they will not necessarily be the cheapest rate but could be a better choice in certain circumstances.
It is a current trend that 5-year fixed rates are often the preferred option in today's marketplace, accounting for over 50 per cent of new buy-to-let mortgages. However, in this period of economic uncertainty some buy-to-let investors may be interested in even longer fixed rates, especially as interest rates are still relatively low. There are a number of 7-year and 10-year fixed rate options currently available which may suit some clients.
It is apparent that lenders are starting to think outside of the box in terms of product design and looking for ways to provide financial solutions for landlords in this ever-changing marketplace and there are now options beyond the mainstream that could help them.
The government has introduced new rules in England, banning landlords and agents from charging fees to tenants associated with setting up or maintaining a tenancy and capping tenancy deposits at a maximum of five weeks’ rent.
Designed to allow tenants to see, at a glance, what a property will cost them in advertised rent, the Tenant Fees Act 2019, applies to all new or renewed tenancy agreements, student lets and licences to occupy housing in the Private Rented Sector (PRS) signed on or after 1 June 2019 – and to all applicable tenancies and licences in the PRS from 1 June 2020.
Allowable fees and charges
Put simply, the only payments that landlords or letting agents can charge to tenants in relation to new contracts are as follows:
- a refundable tenancy deposit, capped at no more than 5 weeks’ rent where the total annual rent is less than £50,000, or 6 weeks’ rent where the total annual rent is £50,000 or above
- a refundable holding deposit (to reserve the property) capped a no more than 1 week’s rent
- payments associated with early termination of the tenancy, when requested by the tenant
- payments capped at £50 (or reasonably incurred costs, if higher) for the variation, assignment or novation of a tenancy
- payments in respect of utilities, communication services, TV licence or Council Tax
- a default fee for late payment of rent and replacement of a lost key / security device giving access to the house, where required under the tenancy agreement
Any fees that aren’t on the list are prohibited and the government’s guidance makes it clear that landlords and agents can’t charge for:
- admin activities or time taken to set up a new tenancy, including reference checks or credit referencing
- providing an inventory
- checking a tenant out at the end of a tenancy
- a professional clean at the end of the tenancy (although landlords may request that a property is cleaned to a professional standard); and
- wear and tear
Prohibited payments are outlawed under the ban and landlords can’t get round the rules by asking tenants to undertake and pay for these items via a third party.
In most areas, the Trading Standards authorities will be responsible for monitoring and enforcing the rules. A breach will usually be classed as a civil offence, carrying a financial penalty of up to £5,000. If a further breach is committed within five years of a financial penalty or conviction, it will be treated as a criminal offence, subject to an unlimited fine.
Landlords will also have to refund any unlawful fees to tenants.
Savings for tenants
The government estimates that implementation of the Tenant Fees Act will save tenants across England at least £240 million a year, or up to £70 per household.
However, ARLA (The Association of Residential Letting Agents) is less sure, and questions whether landlords will be forced to increase rents to cover at least some of the costs.
What’s clear is that landlords can no longer add on fees over and above the headline rent, except for a very limited set of circumstances.
The Government’s consultation, A new deal for renting: resetting the balance of rights and responsibilities between landlords and tenants, draws to a close on 12 October 2019.
Implementation of the key proposals – removal of the Assured Shorthold Tenancy (AST) and abolition of the Section 21, no-fault eviction process – if adopted as planned, will mark a landmark moment for the PRS.
Interestingly, both measures were brought in as part of the Housing Act 1988 and both helped to encourage investment in the sector by enabling much more flexible arrangements, not only for landlords but also for tenants.
The expansion of the sector is well-charted and, with one in five people now relying on the UK’s Private Rented Sector (PRS) for a home, the Government hopes its proposals will introduce greater security for those tenants who need it, whilst maintaining flexibility for those who don’t.
If implemented, the proposals mean all new tenancies will either be an assured periodic tenancy – effectively an indeterminate tenancy - or an assured fixed term tenancy, which reverts by default to a periodic tenancy.
Tenants will be able to end a tenancy with two months’ notice.
Landlords, in contrast, will only be able to end a tenancy where they can prove they have legitimate grounds under Section 8 of the Housing Act, with a notice period of between two weeks and two months depending on what those grounds are.
Section 8 does already give a wide range of grounds, including a breach of tenancy agreement, such as rent arrears or damage.
However, it doesn’t allow for a situation where a landlord is looking to move into their own property or to sell it and the government is proposing an update to accommodate this change.
Equally critical for landlords is the process they need to follow if a tenant refuses to leave at the end of the notice period.
Today, whether using Section 21 or Section 8, landlords need to make a court application for possession if they find themselves in this situation.
However, while landlords using Section 21 can follow an accelerated possession process where appropriate - making a formal court hearing unnecessary in many cases - landlords using Section 8 don’t have this flexibility.
Few would argue the court system is sufficiently resourced to manage the increase in workload these proposals will deliver and indeed the government is exploring whether to introduce a specialist housing court.
However, given that the median time from claim to possession using the court process is currently 16 weeks and a survey of our landlords showed 85% feel this should be eight weeks or less, a solution needs to be found and found quickly.
Download NLA’s guide on how government changes to Section 21 will affect landlords
We have seen a significant rise in the number of limited company buy-to-let applications being submitted. So far in 2020, over 30 per cent of new mortgages each month have been in the name of a Special Purpose Vehicle (SPV) or trading company.
Limited company benefits
This comes as no surprise as there are several benefits to using a corporate structure for running a buy-to-let property business. Many landlords opt to use an SPV as it can be financially advantageous and tax efficient. Since the government announced the phasing out of mortgage interest tax relief by 2020, there are now more reasons to consider the limited company route to reduce tax liabilities.
In terms of buy-to-let mortgage options, limited company products can also provide advantages to landlords as the PRA regulations relating to rent stress tests for personal applications are not applicable (a rent stress test is the calculation that lenders use to determine how much they will lend to you).
It means that the rental calculations can be more achievable for SPVs – typically at 125 per cent at 5 per cent or at the pay rate for 5-year fixed rates – which may allow applicants to borrow more through a limited company.
Wide choice of mortgages
There is growing competition among lenders for limited company buy-to-let – we currently have around 30 different lenders on our panel - which means that there are some keenly priced rates available. Historically, limited company mortgages were considerably more expensive than personal name rates, but the gap is closing with some lenders now offering the same rates for both applicant types.
Setting up an SPV is a simple, cheap process which can be completed online within 24 hours via Companies House. Most lenders will lend to newly established SPVs providing they are set up for the sole purpose of letting and managing property. For this reason, it is important that the limited company is registered with the correct SIC code – normally 68100, 68209, 68320 or 68201.
Stamp Duty costs
For existing landlords who are considering transferring their properties to an SPV it is recommended that you seek professional tax advice before proceeding. Moving properties from a personal name to a corporate entity involves a sale and purchase transaction which means that Stamp Duty Land Tax and Capital Gains Tax is payable.
Stamp Duty costs may be a deterrent to large portfolio landlords, but there are circumstances where incorporation relief may be granted by the Inland Revenue if it can be demonstrated that the portfolio is run as a business partnership – again tax advice is recommended in this scenario.
We expect the proportion of buy-to-let mortgages arranged via a limited company will continue to grow over the next 12 months as landlords realise the financial ramifications of the changes to mortgage interest tax relief now that it has been completed phased out.
Research shows that in 2018 over half (59%) of England’s landlords are aged 55 years or older and one third are retired. Buy-to-let lenders have started to incorporate the market’s age demographic into their lending policies by identifying the pitfalls for later life applicants and then implementing the necessary changes to remedy this.
Lenders impose a maximum number of years an applicant can have a loan for and so for older applicants the loan term may be restricted. This in turn could affect the affordability of the loans as shorter terms might equate to higher monthly payments. It is worth checking how lenders assess affordability, particularly whether state pensions are considered when calculating minimum income criteria.
Lenders are changing their criteria to make buy-to-let finance more accessible to older landlords. For example, some lenders no longer stipulate a maximum at application or completion. There are also longer-term fixed rates up to 10 years which can offer affordability relief and security of monthly payments. Variable and lifetime products may also provide a solution. Pensions including private, widow’s and war pensions are becoming more widely accepted by mortgage lenders and existing landlords may also be able to use rental income in their income credentials.
Property Hawk Mortgages' Online Application Form for buy-to-let mortgages is designed to make your life easier by simplifying the application process and saving you time.
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