I feel that I need to begin my bulletin today by stating that I have no political affiliation. I am neither Red, Yellow, Blue, Green nor any other colour that has been tainted by the rule of many by few.
Mind you, UKIP’s sponsorship of the Premier League certainly caught my attention; but it turns out that any similarity in logo was purely coincidental.
Political declarations and rubbish jokes aside (yes that was an attempt at a joke by someone in compliance!); I feel it is necessary to turn our attention to the positions the two major parties have taken regarding home ownership.
For decades, the Conservatives have proclaimed themselves to be the ‘Homeowners’ party (just take a look at what Mrs Thatcher did to the UKs housing stock in the 1980s).
But along came George Osborne (the then chancellor) and changed everything we thought we knew about the Conservatives and capitalism. The raft of changes introduced to the Buy to Let market place that were instigated by the then Chancellor of the Exchequer have certainly proved to be more socialist in their approach that we would normally expect from the ‘centre right’.
On the opposite side of the political divide we have Jeremy Corbyn, who, would like to be thought of as the leader of the Party that considers themselves to be the ‘tenants champion’.
Just last month at the Labour Party Conference Mr Corbyn spoke about the need to consider rent controls, thus capping the level of income that can be gained from property investment.
Concerns have been raised by some that when this was done previously it has not been particularly beneficial; in fact, rent controls, historically and in other parts of the world, have generally served to stifle the property market and has impacted upon the general standard of accommodation.
What a political choice!
So here we are, vendors in a political no-man’s land; trying to turn a profit in the most challenging of circumstances.
It is at this time I am reminded of the wise words of Albert Einstein – “In the middle of difficulty lies opportunity”.
Yes, Buy to let, has never presented us with more challenges, but with challenge comes opportunity.
The Buy to let market, despite the recent challenges regarding taxation, stamp duty and regulation, is still estimated to be worth in excess of £33 billion. What slice of this market do you want?
It is your attitude to opportunity which will define your success.
The good news is that there still remains a residential rental market (despite the best efforts of both major parties); yields are still good (please seek suitably skilled and qualified independent financial advice on this matter and don’t take the word of the Compliance Director on this), demand is high and opportunity remains (if you look in the right place).
So how can you differentiate yourself and ensure that your ‘slice of the market’ remains significant and profitable?
Consider 4 ways:
- Education – Below is a list of the key changes that have impacted on the Buy to let market over the last 18 months. Make sure that you are talking to your clients and sharing your experience and knowledge – set yourself up as a subject matter expert.
- Knowledge – Not all Buy to let products/lenders are equal. There will be different stress test rates, different affordability calculators, some will accept other income as a means of demonstrating affordability, some will accept Ltd companies, some will accept first time buyers, some will offer let to buy… the list goes on. Make sure that you build up your knowledge and are familiar with some of the calculators that are available via lender websites. Knowing your client and the products available will really enhance your proposition.
- Be Active – Promote, your services within your demographic – make sure that people understand the risks and the need to get an expert on board. In this regard, speaking with accountants and estate agents will undoubtedly prove positive.
- Diversify – Why not revisit your current clients and discuss the benefits of protecting their investment.
Buy to Let – PRA Changes
As I have previously reported upon, we have already seen the tax and stamp duty changes and no doubt you are discussing these with your clients already and have been for some time.
The latest changes from the Prudential Regulation Authority (PRA) which came into force on 30th September 2017 would benefit from a little more attention though. Here are some of the ‘highlights’.
Properties Owned
Anyone with four or more properties will now be classified as a portfolio landlord. It is worthy of note, however, that different lenders have interpreted this slightly differently depending on the properties and whether they are encumbered or not. Nonetheless, 4 is the ‘flag’!
This means that as advisers, you will now need to keep a log of your client’s portfolios – Lenders will review this to assess the overall portfolio as credit worthy.
Portfolio Landlords
If classified as a ‘portfolio landlord’, additional information may well be needed due to the need for lenders to apply a ‘specialist underwriting’ approach. Details of the approach taken should be obtained from providers directly.
Affordability
Expect that personal income and expenditure will now be assessed. Lenders will be on the lookout for clients’ portfolio income subsidising their personal lifestyle. A negative net disposable income could result in the mortgage being declined.
Particular consideration will be given to:
- Loans
- Credit cards
- Vehicle finance
- Other mortgages
In addition, the potential for changes in personal taxation brought about by the new treatment of property income may also impact significantly on affordability.
Stress Test
Although there is flexibility for Buy to let remortgages, you can expect lenders to start using affordability ‘stress test’ rates of 5.5% and a rental coverage amount of c.145% (thus taking into account the potential for significantly more customers to become Higher Rate Taxpayers).
Rental Income
Expect lenders to begin evaluating rental income more closely. Some will use their own valuations and assessments, others will insist on bank statements to show income received. Expect tax calculations to feature at some stage as well.
As with any new set of rules, there are always some exceptions, they are:
- Non-PRA regulated
- Consumer buy to let
- Consent to let (although these arrangements can be taken into consideration when considering affordability for additional buy to let applications)
- Corporate/commercial lending – this is lending specifically carried out by a lenders commercial division
- BTL re-mortgage without capital raising
- Holiday lets
Opportunity
Allow me to conclude this article by returning to the words of Albert Einstein – “In the middle of difficulty lies opportunity”.
Here is your opportunity:
The autumn statement of 25th November 2015 introduced a number of changes that have impacted upon the buy to let market place, starting, notably with the Stamp Duty change which came in to force on 1st April 2016. That statement triggered a surge in applications for buy to let mortgages, starting in December 2015 and reaching its peak in March 2016. The mathematicians amongst you will have noticed that we are now just shy of two years on from these dates and therefore find ourselves on the cusp of a significant number of 2 year Buy to Let Mortgage maturities. Please don’t miss out on this opportunity!
