April 2019
MORTGAGE INTRODUCER
BUY-TO - LET INTRODUCER
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The times they are a changing A close look at the evolution of buy-to-let ROBERTBUY-TO-LET SINCLAIR IN-DEPTH THE OUTLAW: GODFATHER PART II INDUSTRY COMMENT
HoF : TEQUILA SUICIDE ROUND-TABLE
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Comment
April 2019 www.mortgageintroducer.com
Leaving the negativity behind The buy-to-let sector has been plagued with negativity over recent years. However, it is fair to say that a lot of it has been unwarranted. Granted the buy-to-let market is rapidly changing but with that change there is opportunity. Buy-to-let is still a good investment option in the UK. All things considered and despite successive Chancellors hitting the sector with numerous legislative penalties including an increase in stamp duty, a reduction in high rate tax relief for landlords and a higher rate “Lack of supply and of capital gains tax on tricky affordability residential property profits, rules still hamper the fact remains that bricks and mortar is still one of aspirational the best and most stable homebuyers” investments available. Lack of supply and tricky affordability rules still hamper aspirational homebuyers. And looking forward there appears little in the pipeline that will change the situation for many of those looking to make their first step onto the property ladder. That in mind it is clear that the need for professional, honest landlords is going to remain for some time to come. These honest professional, landlords are in need of a number of things moving forward. Chief amongst that list is access to finance. This in itself requires a broker that understands the nuances of this market and has kept abreast of what is a market in flux. The days of the single touch broker getting involved in buy-to-let seems to be coming to a close. Instead the market is becoming more specialist on both the broker side and the lender side. We’ve seen some lenders fall by the wayside in recent months but alongside that we’ve seen some of the more adaptable specialist lenders flourish. It’s clear that the market is in a time of flux but it’s also a time of opportunity for those looking to embrace it.
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4 The end of buy-to-let?
Natalie Thomas considers if the reports of the death of buy-to-let have been greatly exaggerated
10 Building trust – The Landbay way
Michael Lloyd catches up with John Goodall and Paul Brett of Landbay to discuss why trust is at the heart of the firms ethos
14 Round-table
The latest industry debate
23 Alan Cleary
Incorporating as a limited company
25 Craig McKinlay
The state of play in buy-to-let
27 Ian Boden
Daring to be different when it comes to buy-to-let
29 Richard Tugwell
Four reasons the buy-to-let market has changed
30 Jeff Knight
Opportunities continue to abound in buy-to-let
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The end of buy-to-let? Natalie Thomas considers if the reports of the death of buy-to-let have been greatly exaggerated
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f the ghosts of the buy-to-let market’s past, present and future were to pay it a visit they would certainly be greeted by three very different scenes. Jump back ten years ago and BTL was one of the few sectors experiencing a boom in a post credit crunch world. Today’s present-day market is in many ways a shadow of its, once buoyant, former self due to the regulatory and tax changes thrust upon it. Yet upon reflection it has also manifested a stronger and more resilient market than many once anticipated. So, what of the BTL ghost yet to come? Is the sector’s future something to be feared, or can the market shape its own fate?
Challenging conditions
The sector has been the target of many people’s grievances over the last decade, not only those of the former Chancellor of the Exchequer George Osborne but also the regulator. Yet it has still retained a strong life force within the mortgage market. “One of the aims of Osborne’s changes to BTL mortgage interest relief was to professionalise the BTL arena, and that appears to be working,” says Steve Olejnik, managing director at Mortgages for Business. “Certainly some amateur investors are feeling the pinch and exiting but the professional landlord is still very much in the game, factoring in additional costs, keeping up to date with regulations and taking proper tax advice when deciding how to structure portfolios,” he proclaims. “The UK Finance BTL lending figures for January this year – £3.28bn including product transfers – were up month on month on the £2.76bn lent in December and only slightly down on the 3.47bn lent in January 2018,” he says. Olejnik has been running a straw poll with his clients to gauge the mood of the market. “Some 55% tell us that they are not affected by the B-word and are continuing to expand their portfolios, while 24% tell us that whilst they are not currently expanding, they are continuing to remortgage property,” he says. Joe Arnold, managing director of Arnold & Baldwin Chartered Surveyors, echoes Olejnik’s sentiment and is also not seeing a mass exodus of landlords. “There has been a reduction in purchase volumes across all property transactions over the last couple of years, including BTL, but we haven’t seen evidence of landlords selling off their stock,” he observes. The sector’s optimism is even more encouraging when you consider it is not just the regulatory and tax changes it is currently having to contend with but also the economic uncertainty Brexit has created. “When you assess business volumes within the purchase market it’s evident that these are relatively subdued on a historical level, but it’s important to
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be realistic about the political and economic circumstances we are operating under,” says Jeff Knight, director of marketing at Foundation Home Loans. “When you consider the impact of regulatory and tax changes in recent times, there are not many – if any - sectors within specialist lending which would have coped so well,” he says. “The remortgage market is an area where we will continue to see opportunities arise for intermediaries and activity levels should continue to pick up over the course of 2019,” he adds.
Current trends
Lenders in the BTL space have helped keep the sector’s spirit alive and ensured it has not lost its way in recent times. “The remortgage market especially is particularly buoyant with the continued low rates proving to be an attraction giving increased cash flow,” says Ying Tan, managing director, The Buy to Let Business. “There is a high demand for 5-year fixed rates to give certainty during this uncertain economic period, whilst also allowing the landlord to have more breathing space on the rental stress tests,” he adds. Greg Cunnington, director of lender relationships and new homes at Alexander Hall says novel approaches from lenders have helped ease the pressure on the market. “Lenders have been loosening their policies in relation to more top slicing options being in the market and also more transitional remortgage options, which have helped to support the market from a lending perspective,” he says. “Most of our BTL mortgages are with properties in London and the South East, so with the low yields these two options are vital where any loan is above 60% LTV,” he adds. Another key product feature the market is seeing demand for are products which have little or no early repayment charge (ERC).
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Recognising the contribution of landlords Chris Norris, director of policy and public affairs at the National Landlords Association (NLA)
landlord’ will lose over £850 per year, per mortgaged property, thanks to the change in income tax reliefs. The NLA anticipates that this will result in the loss of over 90,000 homes from The landscape of the the rental market. Research conducted private rented sector with the help of NLA members suggests (PRS) has changed immensely over that the part of the market we represent the last decade. Landlords have faced contracted by approximately 0.36 per cent uncertain house prices, decreasing in the last quarter as portfolio landlords yields, a reduction in mortgage lending, continue to sell more properties than they and increasing pressure from councils acquire. for private landlords to fill the shortfall With the confusion of Brexit, it’s hard to left by the decline in social housing, as accurately predict what’s in store for the well as increasingly stringent government PRS in coming years. We would certainly regulation. like to see the possibility of a housing court It is essential that landlords provide and its inherent benefits in enabling swift safe homes to tenants. However, existing justice discussed in greater depth. regulations should be adequately enforced We hope that the government desists in to ensure that criminal landlords are unable its over-regulation of the PRS. Rather than to operate. This has not happened in many adding to the stack of poorly understood areas, and suggestions about increasing housing legislation, we would prefer a regulation do not address this fundamental genuine focus on enforcement against issue. those who flout existing rules. Private landlords have also been at the We’d also like to see the government receiving end of a great deal of punitive address some of the long-standing tenant tax changes over recent years, which are concerns relating to affordability, security having a significant impact on the PRS as of tenure and property quality, without a whole. penalising good, law abiding landlords in Because of the nature of the headline the process. changes announced in 2015, the most The PRS offers an invaluable acutely affected are those with moderate contribution to life in the UK and the or high gearing, and those who have purse of the Exchequer. New research chosen to invest personally, rather than via by the NLA has found that the estimated a company structure. It is these individuals total Income Tax contribution by private who now find their margins squeezed by landlords exceeds £3.8bn annually – additional tax liability. Based on research more than double Tesco’s entire annual commissioned by the National Landlords tax bill. We hope that in years to come, Association (NLA) and conducted by landlords’ contribution gets the recognition Capital Economics, we estimate a ‘typical it deserves. “Although landlords have no set plans to sell, they want to be able to consider selling as an option if they struggle to renew tenancies,” says Cunnington. Olejnik says lenders have certainly upped their game when it comes to remortgage business and product transfers, in a bid to retain customers who might otherwise have refinanced elsewhere. “We are also seeing increased activity from our customers in the Midlands and North West in parAPRIL 2019
ticular. Houses in Multiple Occupation (HMOs), semi-commercial properties and holiday lets too, are proving popular as landlords look to mitigate the increased costs and increase profits,” says Olejnik. Arnold is also seeing landlords turn to HMOs in order to bolster profits. “We are seeing a notable increase in demand from landlords who are buying traditional properties, like large three-bedroom
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semis and converting them into HMOs that could potentially earn between 50% and 100% more than a standard BTL investment in rental income,” he says. “Given the dynamics of an increasingly transient workforce, this type of accommodation is becoming more popular,” he believes. Tan agrees but advises: “As landlords chase higher yields HMOs are becoming more attractive – although landlords should ensure they thoroughly research the area and budget for all possible costs.” A general diversification of portfolios seems to be a theme for a lot of landlords at the moment. Knight is seeing sustained growth, not just for HMO business but also niche short-term lets amongst portfolio landlords and an increased move towards the use
How tax and regulation changes could impact landlords Kate Davies, executive director of the Intermediary Mortgage Lenders Association (IMLA)
the changes to rules relating to HMOs which were enacted in 2018, mandatory registration and a new standard tenancy in Scotland and the increased use of selective licencing powers by local authorities The BTL mortgage in England. market was stronger in 2018 than There is also concern that the many had expected with gross lending inclusion of housing benefit in Universal reaching an estimated £37bn. But Credit may lead to more tenants we don’t expect this to be repeated defaulting on their rent payments – in 2019 - we forecast that total BTL which may in turn cause some landlords lending – both for house purchase and to fall behind with their BTL mortgage remortgages – will fall 3.5% this year to repayments. £36bn. For a minority of landlords, these The most significant issues facing changes represent a ‘perfect storm’. BTL - and a core reason for the The increase in regulatory costs for the continued downturn - are the adverse PRS regulation and higher tax demands tax changes that have been announced for higher rate tax payers may leave since 2015, changes to the regulation some landlords with little choice but to of BTL mortgages and changes to the reduce the size of their portfolios. For regulations covering rented properties. others, the changes represent enough of The most important tax changes are a shift in the relative balance of benefits the imposition of a 3% Stamp Duty and disadvantages to persuade them to surcharge and the restriction of the sell one or more properties. mortgage interest deduction to the basic The impact on landlord purchases is rate of tax, which is being phased in until already clear. In 2018, BTL landlords 2020-21. purchased an estimated 66,000 The most significant changes to properties, 44% down on the 117,500 regulation of the PRS itself have been figure recorded in 2015.
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Our forecast for BTL house purchase lending is consistent with 59,000 individual house purchase transactions in 2019, suggesting that landlord purchases will have halved since 2015. It is clear that, as a result of the tax and regulatory pressures on landlords, net new investment in the PRS has effectively stalled. After filing tax returns at the end of January 2019, landlords are now having to face up to the financial challenges put upon them by the increased legislation and adverse tax changes. Recent government figures indicate that the need to increase income hasn’t yet come into effect as landlords still weigh up their options, but it seems inevitable that pressure to increase rental prices across the UK will grow. The PRS is an essential element of the UK’s housing provision, with around two thirds of tenancies in England having BTL loans attached to them. A number of IMLA’s members serve this specialist mortgage sector, so we will continue to closely monitor the impact of the tax and regulation changes.
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of limited companies. “Lending to landlords using limited companies is proving to be one of the fastest growing areas and has become an increased focal point for many providers,” he comments. “Market forces will ensure that further competition heats up within this product field, with rates following suit and more options emerging. This is good news for intermediaries as we believe these types of cases are the ones where landlords need additional support. This has certainly proved to be a strong area for us in recent months,” says Knight. Tan expects the trend of landlords moving towards limited companies for purchases to continue over the next five years. “Especially for higher tax rate payers,” he notes.
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As more landlords look towards the limited company option, it could potentially be good news for brokers as they seek advice. “For purchase applications I expect there will be further increases to limited company BTL as the tax changes hit,” says Cunnington, “as clients are becoming better and more aware, they need to seek professional advice, so we should see more of these for some clients,” he adds. “I also expect to see the trend continue where landlords look for more yield and to diversify their portfolios, leading to more investment outside of the M25 for BTL purchases,” he adds.
The market’s fate
As with any industry, predicting its future course is not always easy.
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Knight says the sector’s future is particularly hard to predict in the current climate but it is something many landlords are preparing for. “With so much uncertainly still in the air and lenders having to factor in so many variables, some of which are beyond their control, nobody can be sure of what the BTL sector will look like in 12 months’ time, let alone five,” he says. “This uncertainly is currently causing landlords looking towards longer-term products and aligned with certain degree of flexibility where possible,” he adds. Whatever the future holds, Knight is confident the market will be able to handle it. “The only thing we can be sure of is that BTL will continue to
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Professional advice is more relevant than ever Kevin Purvey, director of intermediaries, Coventry for Intermediaries Just like last year, the BTL market continues to be dominated by remortgages and product transfers. We’re also seeing an increase in landlords taking out 5-year fixed rates, as these not only represent good long-term value at the moment but benefit under PRA rules from a reduced stress rate. Another trend, perhaps reflecting current levels of uncertainty, has been for products which offer flexibility, especially around ERCs. In contrast, purchases remain subdued reflecting the enduring impact of tax and regulatory changes in recent years. However, although some smaller landlords have undoubtedly left the market, there’s been no real evidence of the mass exodus that many feared when the changes were first announced. Perhaps the most noticeable impact of all these changes has been increasing polarisation of the BTL market, between the distinct categories of portfolio and nonportfolio landlords. Equally lenders evolve in line with any potential additional government intervention and shifts in market conditions,” he says. “Fortunately, landlords, intermediaries and lenders have demonstrated their adaptability in various guises over the years, and with the BTL sector continually proving to be a vital component within the overall housing market it is certainly not going away anytime soon,” he concludes. Arnold says there is little dispute that there will continue to be significant demand for private rental accommodation from tenants. “We have seen evidence that in times of uncertainty, investors prefer to put their money into more tangible assets, like prop-
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have adapted too, with many examples of new lending criteria focusing on the changing market requirements. These include adapting Interest Coverage Ratio (ICR) calculations to applicants’ tax rates and developing specific propositions for portfolio landlords, Special Purchase Vehicles (SPV), limited companies, bridging, let to buy, holiday lets and many more. As a result, the BTL market is now much more complex and difficult for landlords to navigate, so the expertise and knowledge that brokers can provide is needed more than ever. A good example for those building a portfolio of BTL properties is the increased importance of tax advice. Something that is equally important to landlords buying through a SPV or limited company. And there are more changes to come, for example the upcoming Tenant Fees Act which will prohibit landlords and letting agents in England charging tenants any additional fees when they sign up for a new rental property. It will be interesting to see how this affects rents and the BTL market as a whole. It’s always difficult to predict how the BTL market will fare in the
years ahead, particularly with the current uncertainty in the economic and political worlds (don’t worry; I won’t mention the ‘B’ word). But it’s likely that there’ll continue to be strong demand for BTL properties due to the lack of social housing, high house prices, and societal changes that make renting more of a lifestyle choice. It’s also likely that, as government and local authorities’ aim to raise the quality of rental stock through increased licensing and Energy Performance Certificate (EPC) standards, ironically interventions that may hurt tenants as landlords pass on increased costs, BTL will continue to evolve into a more professional market. Throughout this raft of change there has been one constant the intermediary. Right from the outset, brokers have been crucial to the development of BTL - initially sourcing products from a small pool of lenders to helping clients navigate a highly complex market with multiple options. Indeed, with the increasing complexity it’s never been more important for landlords to seek professional advice so the future certainly looks bright for the intermediary market.
erty, as a more stable instrument than the FTSE. So, the fundamentals of BTL remain strong and over the next five years, I’d expect committed landlords to adapt to the new taxation and regulatory regime and continue to invest in their portfolios,” he says. Olejnik agrees and believes the market will continue to become a more specialist lending arena and force landlords to professionalise their offering as the new fiscal regime and the Prudential Regulation Authority’s regulations bed in. “This should be good news for brokers who take the time to really understand BTL lending criteria in order to meet the needs of their customers. Brokers who APRIL 2019
choose to concentrate their efforts in other markets, should partner with the specialist intermediaries to ensure that they can service any BTL business which comes their way,” Olejnik says. “At the end of the day, housebuilding levels are still not where they need to be which means that demand for rented accommodation continues to outstrip supply in many areas,” he concludes. With the fundamentals of the BTL market still seemingly strong and landlords having many options open to them when it comes to diversifying their portfolios, there is every reason to suggest the sector’s future persona is not one to be feared. BUY-TO-LET INTRODUCER
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Interview
Building trust – the Landbay way Michael Lloyd caught up with John Goodall, chief executive, and Paul Brett, head of intermediaries, to discover what makes Landbay a buy-to-let lender you can trust John Godall says: “Most of our lending fits into the core specialist buy-to-let market.” As a lender its offering is mainly in the residential buy-to-let field but it's also been known to play in the larger HMO space that is usually covered by commercial lenders. With many brokers tending to send such deals to commercial lenders and overlooking firms such as Landbay, it is a point that managing director of intermediaries,Paul Brett, is keen to stress. “Quite often a broker will think they have to look purely at commercial lenders for larger HMO’s,” he says. “However they would be surprised at what is out there product wise. At Landbay we’re often a fair amount less expensive on this type of lending. It’s always worth checking with us first.”
The government’s crackdown on buy-to-let has left many landlords and mainstream residential brokers scratching their heads as confusion reigns in the sector. And this crackdown, coupled with unclear and sometimes confusing guidelines, has left a void for skilled specialist lenders and brokers to fill when it comes down to education. One such lender filling that gap is, specialist buy-to-let firm, Landbay which has been working hard to help borrowers and brokers get a handle on the market – and that’s not just on cases that fit their criteria. As a lender Landbay is all about trust and it is gaining it in spades thanks to its pragmatic, entrepreneurial approach and its transparency with both stakeholders and consumers.
Trust with brokers
Founded in April 2014, Landbay has rapidly established itself as a key player in the specialist buy-to-let space. It’s a lender that has an eye for the deals out there that the bigger banks may not consider. But that’s not to say it’s range is narrow and as chief executive
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Service
As a lender that has worked hard to establish itself as a player in the market over the past few years Landbay is keen to set itself apart. One way in which it attempts to do this is through its service. Be it APRIL 2019
an HMO deal, a challenging case or a broker/client who has never used Landbay before the lender works hard to provide the best service possible. “Brokers are anxious at the moment,” says Brett. “We’re here to support them and are totally broker focussed. “If a broker interacts with us once I believe they’ll use us again. I also believe its down to the fact that we are transparent and not judgmental.” For Goodall its all about trust, something he appreciates can be fickle in a changing market. “I think within financial services generally, not just mortgages, building trust is hard,” he adds. “We’ve been around, being consistent and doing the same things again and again. “It takes time to build trust but you can destroy that trust very quickly. It’s a long-term game and we’ve always focused on service which largely comes from our people.” To maintain the high standards they set themselves Landbay has been working hard to get the right people on-board to supplement their team. This has seen the addition of
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Paul Brett (left) and John Goodall (right)
Interview
the year. The need for such growth is in part being fed by the PRA and taxation changes that have dominated buy-to-let headlines over recent times. Whilst other lenders have been forced to retreat from the market, Brett says the changes have actually been a boon for Landbay. “I think the product offering and service we have has married in very well with the way the market is polarising,” Brett says. “We do lots to reassure our broker partners and help them out. “If an intermediary wants to talk to one of our mandate holding underwriters directly, we’re
new members to both the sales team and underwriting team over recent months. Goodall says: “The people we’ve invested in know what they’re doing and are specialists and can talk about that area, and we think that’s a key advantage for us.” “We joke that even as we’re growing John will still pick up the phone and take calls and enquiries,” Brett adds. The past six months has seen the size of the Landbay team double, now standing at 65, and Goodall expects headcount to reach about 100 by the end of
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absolutely fine with that. “Our underwriters are really experienced in our marketplace. Quite often the broker may be experienced but may get a scenario they don’t often come across and that’s where we work best, supporting them through the process.”
Joining the club
Recent times have also seen Landbay improve its distribution as it continues to gain traction with mortgage clubs. Speaking to Brett he’s keen to stress the virtues of Landbay’s introducers including the
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“amazing packagers” they work with but for him its about continued growth – something that mortgage clubs and networks can play a key role in. “For us it’s really important we have a wide distribution base,” says Brett. “Last year a big part of my remit and mission was to get involved with the network and clubs. “We’re now on all the major club panels and with the majority of the networks. It’s great for us and for the members of those clubs and networks. We feel we can really bring something beneficial to members, while making sure our Packager partners also have bespoke products right for their distribution.” The big challenge facing Goodall, Brett and Landbay is how to capitalise on their increased distribution. As Brett says being on a network or club panel is not a “license to lend”, you have to work with the stakeholders and keep pushing and promoting your products all the time.
Government changes
Whilst the government’s changes on the buy-to-let sector have been widely criticised Goodall says he hopes the powers that be have now achieved their aim and will allow the market to find a new normal. Goodall says: “The government has slowed down the growth of buy-to-let and house prices. In that sense the government shouldn’t do any more. “In theory it should be job done and there should be no more changes, but we’ll see, and I suspect that won’t be the case if Jeremy Corbyn gets in,” Goodall says. On the upside, the new rules have meant that the specialist lending sector is growing. And Goodall says this is in correlation to some high street banks seeing their buy-to-let books shrink over the last three years.
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"Whilst the government’s changes on the buyto-let sector have been widely criticised Goodall says he hopes the powers that be have now achieved their aim and will allow the market to find a new normal” “There is more specialist business out there,” he observes. “Even though buy-to-let is in a relatively low growth environment, the specialist market is definitely growing. “Some of that is driven by the PRA changes, some by the increased use of limited companies, the increased attractiveness of HMOs. It’s not just us, Precise, OneSavings Bank, Paragon, and other specialist lenders, are all growing at the expense of the vanilla high street lenders.” Indeed these changes may prove to be the making of a specialist firm like Landbay.
Looking forward
So with the mortgage clubs and networks on-board and plans in place for continued growth, what does the lender plan to do next? Goodall says Landbay is here for the long-term and committed to the sector. For him and his team it is about becoming a leading lender in this buy-to-let space – something he admits takes time
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and investment. “We think there’s still a massive opportunity within the buy-to-let market,” he says. “In the grand scheme of things, we’re still small players, but we’re becoming a meaningful and award-winning lender in this space. “It’s just about doing more of the same but doing it better because we still think there’s a lot of growth in the market. “We think we can take a growing portion of a growing market which, as a business proposition is good. It’s still early days for us.” Landbay’s message is clear: it’s here to support brokers getting involved in the specialist buy-to-let sector and is here, not just to stay, but grow. And as Brett concludes: “This is a market we are committed to and one we see real ongoing potential in. “I’d call on brokers to really consider Landbay, if they haven’t already. We’ll show them that the Landbay name is a name you can trust.”
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Round-table
Let’s keep moving Our experts look at the future of buy-to-let in uncertain times AR: We’ve noticed a big change in the knowledge of the client when they first speak to you. It used to be ‘what’s your opinion on limited companies’ and now they’ve done more research on it and have an opinion.
Ryan Fowler: What’s the outlook for the buy-to-let market in the current uncertain climate? Paul Brett: As we all know the buy-to-let market has been retrenching but the part I’m interested in is specialist buy-to-let which is growing and will continue to grow. I’m quite confident about this specialist sector of the market. I think it’ll remain the same as this year or grow a bit, because I think there will be a lot of remortgage business, like 3-year rates.
Roger Morris: One in four landlords have been contacted by a broker or lender about the changes so I think the reason we have uncertainty is as an industry we’ve let the landlords down. One of the main reasons for that is most brokers are clueless about what’s the right direction or equally as frightened about seeing to be giving tax advice, whereas if it was residential remortgages or purchase, they’d happily explain the difference between fixed and discounted. So, brokers need to remind themselves about the difference between information and advice. With the incorporation tax piece and Ramsay Ruling my concern is that a lot of people doing an LLP and moving to beneficial interest and offsetting the interest in the accounts in the last two years have been advised they can incorporate but once they do, the revenue will jump on them because they’ve been offsetting the interest for the last two years with the beneficial interest passthrough, so I think an awful lot will get themselves in a lot of bother on the way a lot of this advice is structured. With let-to-buy we’ve seen lots of people sell the residential into a limited company to really change the stamp duty rules. It doesn’t work for everyone. I would say the broker is less confident on the knowledge with limited companies than some landlords.
Jeff Knight: There’s a lot of uncertainty but it’s not really reflecting on business levels. Ian Boden: I think professional landlords are seizing an opportunity in an uncertain market. I agree there’s a shift in the market towards specialist and professionalism which is more buoyant. Anthony Rose: I think the market’s just changed very quickly. The only stuff we see as brokers in the personal name is just remortgage and let to buy. Everything else is limited company. It’s also now just specialist enquiries outside the M25. Jeff List: The last two years of guiding someone with their account of what way they should be going means we’re now going to see the fruits coming from that with the incorporation piece. Paul Broadhead: There’s definitely more professionalism in the sector. A lot of the dinner party landlords have, or are, exiting from the market. The remortgage market is hugely buoyant.
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JL: A lot of brokers will always remain in that residential sphere. Buy-to-let is no longer part of that, it’s changed and has become a commercial contract. The dinner party landlord is slowly disappearing and we’re dealing with professionals more. Richard Tugwell: I think that the changes to the market over the last couple of years have had the effect of restricting the ‘amateur’ landlord purchase and opening opportunities for the more professional landlord with small to medium sized portfolios. The remortgage market should remain buoyant as both types of landlords look to get their mortgages on a better footing. As ever in an uncertain market, research and good advice around purchase prices and rental yields and voids is essential. RF: Do you think we’ve seen all the changes or is there still likely to be a number of people exiting the market over the next couple of years? JL: I think they’ve changed the way they act. We’ve seen people who had one or two properties realise they have equity in them and bought more, now owning five or six properties. The PRA changes and changes to how lenders work to make these people more commercial minded. RM: 65% of properties of buy-tolet, or maybe 63% in the south east, have been bought with cash. The most effective way to own is unmembered and specifically the tenants in common part, will attribute to the equitable division of the income to the lower tax person. We’ve seen a lot of remortgage
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Round-table
(From Left to Right) Jeff List, Brightstar Financial; Jeff Knight, Foundation Home Loans; Anthony Rose, LDNfinance; Paul Brett, Landbay; Paul Broadhead, Building Society Association; Ian Boden, LendInvest; Roger Morris, Precise
going through where the applicant’s downloaded Form SEV then changed to joint tenants from tenants in common and they’ve explained to the customer about Forms 17 and the difference in affordability. We’ve seen the high mortgage, low yielding properties being offloaded and replaced by high yielding low mortgage ones like HMOs, student lets, multi units and holiday lets which massively changes the profitability. RF: Can you elaborate what SEV and Form 17 is for those of our readers who don’t know? RM: Statistically most buy-to-lets that have been held for more than five or six years will be as joint tenants and unless the broker, lawyer or accountant stipulate it’s tenants in common, it won’t be like that. It’s simple enough for a client to download Form SEV and within 24 hours can change from joint tenants to tenants in common. Your client should get full tax advice, but a broker can explain the simple change of ownership, like within 60 days of ownership being changed, you can pass the income to the person not using the tax allowance. PBrett: As well as these amateur
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landlords that may be looking to exit the market there’s still a lot that’ll stay in the market and others that’ll come in. It may not be for purely yield, some may be hedging against house price inflation for the long-term. I think we’ve made a lot about amateur landlords leaving the industry, but professional landlords are seeing opportunities. AR: The tax changes are filtering through and the housing market has come off. If post Brexit you see a push up in house prices you might see a lot of people take a profit whereas now they’re feeling like their property has gone down £50,000, £100,000 over the last few years and don’t want to sell it. That flips out to the other side and you might see them exit and take the profit out. RF: We’ve also seen a couple of lenders exit the market. Do you have any thoughts on this? AR: I think it’s just the merry go round of entrants coming in and going out and is probably the individual success of businesses rather than the actual market. JL: Unfortunately, with the resi APRIL 2019
structure it’ll become rate driven but lenders should come to the lender being criteria driven with a piece of criteria that sets them out from everyone else. It comes down to the knowledge of the product and knowing what you can do with a lender outside of that spectrum. PBrett: Rates will always be important but a professional will take into account the services more, from the intermediary and lender, the trustworthiness and the ability to lend in a fairly seamless fashion. Resi is a one off and buy-to-let gives repeat business so it’s more of a relationship. JL: It’s also lenders making it easy for repeat business. If it’s been underwritten once do they have to underwrite it every six months, especially for a portfolio landlord, or a lender could say ‘it’s already underwritten, have you changed circumstances?’ RM: Speaking as a landlord you want confidence. You want to know that lender will remain around, that you can maintain a relationship with and grow your portfolio with. That’s more important to me than price. AR: Within the specialist sector, which is where buy-to-let is BUY-TO-LET INTRODUCER
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RF: There has been a lot of publicity around ‘no DSS’ clauses in buy-to-let contracts. Should lenders abolish these?
heading, from a broker’s perspective, if you know a lender does different segments you know it’s easier to place a case with them and you’re less likely to have to go elsewhere which you might have to do if you go to a lender that only does one segment. IB: I think the market’s polarising for advisers and lenders. As the buy-to-let market becomes more specialist it means you need a specialist broker and specialist lender. For a lender to be active in the growth part of the buy-to-let space, they need to act more like a commercial lender than residential lender. PBroadhead: You can’t dabble in this market.
RM: I’ve just toured the UK with a large professional organisation trying to give them high level presentations on the different lenders in different areas. I had to reduce its level because not all the audience was active in buy-to-let but other areas and were coming to upskill and thought it was complicated.Over the next five years we’re going to see product transfers virtually disappear as buying habits online change and buy-to-let will become the mainstream.
JL: It’s specialist. Why don’t we have people with the correct qualifications? We’re not giving tax advice, we’re saying you need to speak to someone. AR: I agree. Most brokers probably haven’t taken an exam in 15, 20 years and I think the market has changed so much. On a company level a lot of the big firms almost don’t want their brokers giving advice on more detailed stuff like second charges.
AR: In order to charge a fee consumers have to feel like you’re doing something they can’t. You have to add value.
JF: When dealing with portfolio landlords if you get one part wrong you may potentially get their whole portfolio wrong and then you’ve potentially failed that client in every single transaction following that point.
RF: How are building societies viewing the market? PBroadhead: They’re cautiously optimistic. They’re still doing well on market share and a number are rebalancing where their focus is. We’ve seen a few more come into the buy-to-let market and more will continue to do so.
AR: And a lot of firms don’t understand their PI cover either so they’re probably doing business they’re not covered for.
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PBroadhead: It’s been there for quite some time. A few lenders adapted their policy to this no DSS a few years ago when there were housing benefit changes meaning it wasn’t guaranteed to cover 100% of the rent and that made perfect sense. Now it’s become a political football with select committees and lenders such as NatWest backtracking from their stance. It’s a commercial decision for lenders who they lend to and what’s their criteria. How would you know if the landlord has a Housing Benefit tenant in there? PBrett: There was a survey where about 25% of all buy-to-let is rented to people on some kind of benefit and you think how does that collate to data we have? RM: Speaking as a landlord, before Universal Credit came in the average arrears book on people on some form of working tax benefit or credit was about £1,432 a month and after Universal Credit came in it went up to £2,560. And the government is putting pressure on all lenders and landlords to make them house people that they can’t because the local council houses have gone. It’s mixed messages. The government wants to make buy-to-lets unprofitable with George Osborne’s buy-to-let changes and now have thought ‘where do we house people?’ because the biggest single provider of social housing in the UK is private landlords. But landlords have the right to fight back and say they can’t afford to take more losses. With the option between a private and social tenant, with a
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private tenant they’ll get a bigger yield and return and are more likely to get paid. The chances of getting paid with a social tenant is reducing all the time. I think the government has to change the stance on how they treat landlords because there will become a point where they’ll be an awful lot of homeless people. The Section 21 eviction rules means you have to give the tenant a copy of the certificate and booklet. If you haven’t followed the correct process of evicting your tenant, it can take you absolutely ages to get an eviction. IB: I think it’s just an example of the fact we’ve lacked for a decade now, any clear housing policy and the PRS market is very obviously a part of the solution to the housing crisis. But the government is nibbling at it rather than having a clear housing policy. PBrett: And not understanding the knock-on effects. If you force it onto the tenant to be responsible for paying their rent on time, the lender won’t like it and the landlord won’t want to take them. I feel sorry for the lender. And if the landlord has the choice between no tenant and a DSS tenant, they’re going to take the DSS tenant.
RF: What’s an HMO and do brokers understand it and the potential issues around it? RM: I would say with audiences I’ve been to 75% of brokers would get wrong what an HMO is. It’s two or more families or three or more people, sharing the same facilities. It has nothing to do with when the licence is needed. How many brokers ask specifically the type of tenancy and if it’s three non-related individuals, insist it’s a HMO product and check out the local authority to see whether Article 4 is in place because if it is, then they need to advise the customer to consider not purchasing because it will fall down at some point either during legals or post completion. PBrett: That’s the biggest message I’m giving brokers. It’s reinforcing the point if you know or suspect it’s three or more unrelated you know it’s an HMO, but then also looking to the local authority to find if it requires planning permission. And also looking at their license
RM: Areas are being decimated by HMOs. The big areas are North East and North West. We’re seeing loads of landlords raise money in the South East to go for yield in the North and never go and see what they’re buying. AR: I think most brokers don’t understand it and if it’s their responsibility or not to explain it and may not want to implement it. But I think landlords understand it. RM: Imagine we have three professionals renting with a certain lender that doesn’t allow HMOs on the policy. If there’s a fire and no one was injured, and the insurance company investigates, they’d find the product wasn’t appropriate to the license. They’d find out it’s a HMO and the landlord shouldn’t have gone to that lender and therefore it wouldn’t be insured. AR: I think it goes back to the government’s housing policy. It’s not being explained or enforced or related to everyone so many don’t understand it. It’s going to unfairly trap and fine many people who had no idea they were doing anything wrong.
RF: You also feel sorry for the DSS tenant. Moving on what’s the overall trends we’re seeing in the market at the moment? RT: An increase in limited company purchases and a decrease in the number of first-time landlords entering the market
PBroadhead: Government housing policy is so fragmented, and you question what’s the point sometimes when there will be no enforcement. There is no coherent
JK: HMOs. It used to have a stigma but more professional landlords are now seeing them as an opportunity.
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requirements, because the government sets out it’s five or more non-related tenants to require a license unless the local authority has tighter rules and regulations than the government minimums. I tell intermediaries to get onto the local authority website to look at the planning and licensing rules before they go further.
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policy. They recongise there’s a problem but there’s still no solution to it.
portfolio landlords are made up of holiday lets and to me something they’re moving towards.
JK: Portfolio landlords is a new niche which we’ve seen massive growth in. I think there’s a lot of opportunity for brokers and lenders in the future in terms of innovation and technology.
JF: Short-term lets is such an underserved market by lenders and actually criteria is all over the place so there’s not one trend of everyone moving to one area and from there you can work out what the AST value is. Lenders’ thoughts on holiday lets doesn’t work on how we’re looking at income. It’s how do we calculate the income from that person and property without knowing what it’s achieved before or will going forward. So, it has to be in the hand of a surveyor in the area who has looked at a similar property before.
JL: We’ve seen an awful lot of developer exits. Properties that aren’t selling because of a weak market. Developers are deciding to retain whether that being a trade limited company or a newly formed SPV. Other structures are looking to take up bridging or development finance onto a buy-to-let contract so we’re seeing developers becoming landlords themselves.
RM: An Airbnb would raise £800 over the weekend but you have to be careful with it. It works in Cornwall and the Lake District and other specific destinated holiday areas but can be disastrous in areas like Birmingham and London.
AR: We’re doing a lot of our own developer exits where they’re viewing the values they’re hoping to get. They aren’t just putting to market at the moment, so are going to let them or a proportion of them for a year.
AR: But you can’t bespoke a policy that much, that’s the problem.
JL: You could look at it from a commercial viewpoint too, that the equity remains in the property and at some point the hope is it goes up to what the original predicted value was, but at this point they’re just looking to get the money to repay the bridge and potentially move onto the next project which could yield the same return as it won’t be sold. But they have another block. Multi-unit freehold blocks are the next thing.
JK: It goes beyond holiday lets. We’re seeing the growth of contractors over the last few years. They don’t want to be tied in for long-term lets. It’s a niche within a niche but one that’s growing. Lenders and landlords have to adapt as society changes. PBrett: A huge amount of valuations are based on valuer’s comparable evidence and where it’s still such a relatively new market.
RM: It looks quite good so the development’s sold out so from comparables it’s quite good for the developer. Holiday lets are huge because they’re outside of George Osborne’s reforms and 90% of
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JK: The market hasn’t quite caught up with the demand yet. JL: It’s what’s considered a holiday let area.
APRIL 2019
IB: For me it’s terminology. We can’t confuse holiday lets and short-term lets because they’re very different. Your 5-bedroom house in the lakes is a holiday let, commercial mortgage, not a buy-to-let mortgage and the contractor type is a buy-to-let on a short-term let so there’s a difference between holiday lets and short-term lets. It’s lenders trying to work out where the tipping point is between a short-term let becoming a holiday let. RM: But lenders could look at the postcodes like the lakes in Cornwall and having a policy where they only do holiday lets in these restricted postcodes. JL: When these first came to market people said they had to be in seaside towns which is worse because most people there are on DSS. AR: I think the holiday lets comes back to professional and dinner party landlords because do we mean someone doing it as a business or someone just letting it out when they’re not staying there with their family? AR: I think it’s a class in itself because I think Metro allows you to have it on a residential basis but let it out on a set number of days a year. There are many clients who like the idea of buying a home in the Lake District and letting it out when they’re not there but have no idea how many days they’re planning to let it out for. I don’t know how you can get a lending policy to actively reflect that. RM: The building societies seem to offer the best policy when it comes to holiday lets at the moment. It’s
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Round-table
regional understanding. The level of support, knowledge and coverage to help you is great. It’s just the deposit is quite chunky. RF: Are we seeing landlords looking at other regions? Where’s popular at the moment? RT: Professional landlords stay close to rental yields and these are more difficult in London and the South East. Traditionally asset growth has still made this market attractive but uncertainty at the moment isn’t helping this either. PBrett: We’re seeing a move as Roger said, towards North East, North West and major northern cities. The biggest challenge as a lender is landlords’ knowledge of the area. They just buy on yield. The question is if someone out of the area can buy there why aren’t the local landlords so what’s the issue with the property? We’re seeing it but are cautious about it. RM: Research found the biggest area for potential expected property increase price growth was either Hartlepool or Stockton-on-Tees/ Middlesbrough. You have to go see where you’re buying. RF: Is letting to students a good or bad thing and how buoyant is that market? RT: Each case has its own merits. In solid university towns with good managing agents, student lets can provide a great service for that community whilst opening a greater income stream for the landlord. Understanding HMO regulation being alive to likely rental voids, as students can be less stable tenants due to their calendars and ensuring
proper checks on affordability of rent is key. JK: If landlords know what they’re doing it definitely is. I looked at the yield of where my daughter is moving and it’s a HMO and you can see how much they’re going to get. PBrett: If the landlord has an understanding and has really upskilled and are now experts in it it’s great for them. It’s a sustainable market because even if there’s a downturn, students will still go to university and maybe more will if there’s no jobs. RM: I don’t think it’s sustainable. I think student lets is one area for landlords to stay away from. Edgbaston in Birmingham and Hull University are two examples. All universities now have decreasing cashflow and want to create yield and the way for that is controlling student accommodation where they can maximise return and they can do add ons like Wi-Fi. Hull has decimated
Scarborough because they created their own student accommodation. It’s joint ventures with the university and rich organisations to build these huge structures. I would say it’s something to consider if there’s an Article 4 in place, so Southampton and the City of Durham are relatively safer places because the restriction to build big is there but there’s a huge concern in cities like Birmingham and Hull. PBrett: I understand that but not every university will be able to do that, that quickly. RM: But you buy a property for years and if a university gets that funding a few years after you bought a property there, is it too late to sell? JL: We’re doing an ex-converted commercial unit into student pods in Manchester. It’s a living area with a studio and it’s sponsored like having a cafeteria on the ground floor rather than cooking. Its cash buyers taking it for yield. And those that
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used to be student lets are now disappearing and becoming HMOs.
industry generally is reliant on sourcing systems.
AR: You’ll see a big split in the market between landlords with HMOs with some students living in and big schemes where its 200, 300 units, which is a commercial venture not a landlord.
JL: It’s also possibly changing something with the client so they can go to the top of the tree of lenders before having to just go to the specialists. AR: The broker without the knowledge isn’t recognising that.
RF: How important is buy-to-let for intermediaries at the moment and how important will it be going forward?
JL: Our business has changed. Our hand off business is huge from brokers giving us business they don’t understand.
AR: I think it’s massively important from a revenue perspective and risk perspective and I don’t think most intermediaries have cottoned onto that. Many are arranging the wrong products for clients and getting away with it for the moment, but there could be trouble to follow and lenders may say certain brokers aren’t capable of putting in certain types of business.
PBrett: Lenders have to work hard and add value by talking to intermediaries and saying, ‘what’s missing, what do you need?’. AR: I think there is definitely a skills gap for brokers. As consumers you have no idea the person you’re speaking to is competent or not unless you’ve been referred or are great at sounding someone out. The qualification to be a mortgage adviser doesn’t show whether they’re competent or not in today’s industry.
PBrett: And it’s a reputational point of view for a broker. The brokers I know that specialise in buy-to-let are very busy because those potential borrowers have brokers and IFAs but they’re telling these clients ‘we can’t help you’ so they’re looking elsewhere. Some brokers that just do purely vanilla say ‘if I can’t do the loan with whoever’s on page one of the sorting system then as far as I’m concerned the customer can’t do the loan’. The market might become more criteria based rather than rate driven.
JL: I don’t think it’s a bad thing for a broker to say ‘this isn’t something I deal with, but I have access to someone who does’. And if they’re earning something out of it rather than just handing it over for nothing, that’s like another string to their business. PBrett: It’s like the broker being the GP but then referring them to the consultant.
RM: It’s important to get the message through of what a good broker looks like.
IB: There’s probably a need for additional qualifications in the similar way there is with equity release.
RT: The size of the BTL market means that most intermediaries will have new or existing clients that need advice in this area, so keeping up to date with the latest market information and lender solutions is essential.
AR: There’s an irony that the more complicated stuff is actually the non-regulated stuff, so you don’t need any qualifications for that. JK: Some of the large lenders are trying hard to develop better technology and get business away from intermediaries. This is why buy-to-let and other specialist
PBrett: Specialist brokers have a proper understanding of the niches and what lenders offer and what they may be able to offer, when the
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sectors are so important to intermediaries, otherwise in the future they could lose clients. RM: Barclays and NatWest seem to be desperate to get business direct. Barclays will do an offer on a purchase in one minute and 30 seconds for direct. This is the future for brokers. AR: I think for brokers it’s specialist and higher end resi because if you’re borrowing above a certain level you feel the need for advice. I genuinely think there should be an increased level of qualification now for brokers and I think from a lender’s perspective that should lead into being able to do certain types of business as in if you don’t have it you can do resi and basic buy-to-let but to do the extra stuff you need to show you know what you’re doing. There’s a risk to everyone and that’s only going to increase. PBrett: Buy-to-let is not generally only one transaction. It can be a group over time and that’s where you develop a proper relationship with your client. RF: Are landlords fully aware of the PRA changes? JK: A lot of landlords don’t see themselves as a professional even though we may. They might have day jobs and are busy. Many don’t know about the changes and that’s criticism of us as an industry, not the landlords. JL: But there’s a problem that each individual lender has their own interpretation of the rules. It makes it so difficult. RT: I think that in general they are very aware of the changes, but good advice on exactly what they mean for them is more important than ever. PBrett: I’ve told brokers ‘be careful what you wish for’. If landlords understood it all there’d be less need for brokers.
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Is your buy-to-let customer thinking of incorporating as a limited company? The introduction of a raft of regulatory and tax changes over the last few years has led to a rise in the number of landlords considering selling their property portfolios to, or purchasing new properties through, a limited company structure. Research has found that landlords with large numbers of properties are now incorporating their buy-tolet business as they look to reshape
“The phased reduction of mortgage interest tax relief does not affect limited company landlords meaning limited company landlords can continue to offset all of their mortgage interest against profits from rental income”
Alan Cleary managing director, Precise Mortgages
their portfolios. Nearly two out of three (64%) of landlords with more than four properties who plan to buy this year will purchase the property as a limited company, compared with just 21% who intend to buy as individuals. Across the market as a whole 44% of landlords planning to buy will use limited company status but that drops to 17% among landlords with one to three properties. Around two out of five (37%) of smaller portfolio landlords will buy as individuals, the research shows.
Why are increasing number of landlords incorporating?
In the 2019/2020 tax year, landlords will only be able to offset 25% of their mortgage interest for tax purposes and should therefore start planning accordingly. In the 2020/2021 tax year, all of a landlord’s gross rental income will be taxable and landlords will instead be given a reduction in their tax liability equivalent to 20% of their mortgage interest. The phased reduction of mort-
gage interest tax relief does not affect limited company landlords meaning limited company landlords can continue to offset all of their mortgage interest against profits from rental income. Limited company profits are subject to Corporation Tax which currently stands at 19% and is due to reduce to 17% by 2020/2021 tax year. This is lower than the 20% basic rate of tax, the 40% higher rate and the 45% additional rate in England and Wales. Limited company applications are stress tested at an ICR of 125% – less than the 145% ICR most lenders apply to individual landlord applications. IMPORTANT: The decision whether to incorporate as a limited company depends on a customer’s individual circumstances. There are a number of factors that need to be considered and customers should always consult a suitably qualified tax accountant and seek independent legal advice beforehand.
How can Precise Mortgages help? Whether your customer chooses to purchase their next buy-to-let property in their personal name or through a limited company structure, Precise Mortgages can help. As the UK’s leading specialist lender and the lender brokers are most likely to recommend for limited company
buy-to-let mortgages. Our limited company products have already helped thousands of customers, including HMO and portfolio landlords. If your customer does decide to purchase a property as a limited company, here’s how we can help:
No difference in product pay rates between individual and limited company products. Up to four directors/shareholders allowed. No limit on the number of director dependant shareholders under the age of 21. Up to 20 buy-to-let loans per individual with a combined value of £10m (unlimited with other lenders). HMO, multi-unit, holiday lets and refurbishment buy-to-let options available. 35-year term available. Minimum age 21 and can go to a maximum age of 80 at application. First-time landlords, landlords with no residential property and first-time buyers accepted.
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WE USE REAL PEOPLE TO MAKE DECISIONS, NOT JUST CREDIT SCORES. PLUS WE OFFER £250 CASHBACK & FREE VALUATIONS. Making it easier for your customers to own homes. Discover a difference Call 0800 111 020 or visit kensingtonmortgages.co.uk Kensington and Kensington Mortgages are trading names of Kensington Mortgage Company Limited. Registered in England & Wales: Company No. 03049877. Registered address: Ascot House, Maidenhead Office Park, Maidenhead SL6 3QQ. Kensington Mortgage Company Limited is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 310336). Some investment mortgage contracts are not regulated by the FCA. THIS INFORMATION IS FOR INTERMEDIARIES ONLY
Loan Introducer
Loan Introducer Comment
State of play: The buy-to-let market The buy-to-let market is no stranger to having to tackle new issues, with a large amount of change being experienced over the past few years. Amidst a layering of regulation, stamp duty surcharges, stricter portfolio lending and the restricting of finance cost relief, landlords have felt the squeeze. Initial 2018 Bank of England figures gave some optimism for buy-to-let lending, with Q1 showing a good start. The early signs of recovery were confirmed with the buy-to-let lending share at 14.1% (£8.8bn) having increased for the first time since the start of 2017, albeit the overall gross advances for the market stood at £62.4bn. Overall gross mortgage advances grew to a height of £73.5bn in 2018 Q3, the highest since 2007 Q4. However, buy-to-let remained fairly static in value at £8.82bn, but the share declined to 12%, its lowest since 2012 Q4. In Q4 buy-to-let purchase remained low at 12.5%. Similarly, UK Finance’s Mortgage Trends Update for January 2019, revealed 5,500 new buy-to-let home purchase mortgages completed in the month, by value this was £0.7bn, 1.8% fewer than January 2018. Additionally, in January 2019 there were 15,800 new buy-to-let remortgages completed in the month, a 4.2% drop versus January 2018. By value this was £2.5bn, £0.1bn less year-on-year, but January 2018 was a particularly strong month. UK Finance concluded: “We expect the remortgaging sector to see continued strength in 2019, as more tranches of fixed-rate deals come to an end”.
Craig McKinlay new business director, Kensington Mortgages
“House sales have fallen in the past two years and RICS believes volumes will weaken by around 5% in 2019” www.mortgageintroducer.com
Shawbrook Bank recently reported on the proportion of buy-to-let mortgages, completions by individual landlords had fallen from 68% in the first half of 2015, to 34% in the same period of 2018. Whilst for limited companies the figure doubled from 32% to 64%. House sales have fallen in the past two years and RICS believes volumes will weaken by around 5% in 2019. The January report indicated sales expectations for the next three months were the lowest since the survey began in 1999, with a balance of -28% difference (between the number of respondents anticipating increases or decreases). Overall sales expectations throughout every UK region were either flat or negative for Q1. The buy-to-let market is still in transition when it comes to tax relief changes. Landlords that haven’t assessed the impact may be getting their first taste of higher tax bills having submitted their returns in January. Additionally, April 2019 marks the third year of the phasing process and the new announcement that Capital Gains Tax will be reduced for property that was previously used as a main residence. As a result, remortgage activity is likely to continue as landlords manage their costs whilst the limited company market could see further expansion in lender and product choice.
zero completion fee and free valuation product with no up-front application fee, reduced rental coverage, top slicing to allow income from other properties or personal income to be used in affordability assessments.
An opportunity awaits
Buy-to-let has had its fair share of challenges but the market has remained resilient. For those who cannot yet afford, or do not wish to purchase a home, buy-to-let remains a fundamental part of our housing market. We need landlords to continue investing in this, but it’s important that professional advisers are on hand to support them. Whilst this is a time of change, buy-to-let hosts a variety of opportunities, and the rewards on offer for landlords are clear.
Compared to the past buy-to-let has certainly become more complex, which opens up even more potential for specialist lending, rather than the high street one-size-fits-all approach. Investors and landlords must be aware of the different routes available to them, potentially with the support of their intermediary adviser, and it’s up to lenders to find the opportunities for customers be that: limited company buy-to-let mortgages, generous maximum loan to value, APRIL 2019
Making it simple for landlords
Determining the best buy-to-let structure for landlords and the best deal for their borrowing, is a strategic challenge for advisers. Lenders need to do their part and make things as easy as possible for those trying to find answers to their customers’ complex requirements. Providing a single, one-stop-shop for lending means one less thing for landlords to worry about. Both residential borrowers and landlords alike, can feel that they are left on the bench by traditional mainstream lenders. Landlords can struggle to get a good mortgage deal – when potentially wrangling with tighter affordability tests, being selfemployed, and maybe with more complex credit histories – but can responsibly afford repayments. Technology is a big opportunity and many lenders are failing to capitalise on advances that can help address both these issues. As a result, lending is less efficient than it could be for advisers and more costly than it needs to be for borrowers.
The future
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Simple online application.
Dedicated personal service. An online Buy-to-Let mortgage application process backed up by outstanding customer support.
Call us on 0203 846 6809 or visit intermediaries.lendinvest.com. LendInvest Limited is registered at 8 Mortimer Street, London, W1T 3JJ (Company 08146929). ICO number ZA179467. Your client’s property may be repossessed if they do not keep up repayments on their mortgage. For intermediaries only.
Loan Introducer
Comment
Daring to be different when it comes to buy-to-let The buy-to-let market has undergone a host of fundamental changes over the last couple of years, from the introduction of higher taxes on purchasing property to the stripping back of tax reliefs that individual landlords enjoy. The market however has proved its resilience, adjusting to these changes one by one. Today, we see a far greater level of professionalism, dominated by landlords for whom property investment is their ‘day’ job rather than a nice little earner on the side. For us at LendInvest, this is very much where our expertise and experience as a lender lies - these have long been our typical borrowers for both bridging and development finance, and now too for our buy-to-let product range. But what makes our offering truly unique? We believe it’s the combination of our industry experience coupled with our technology that makes accessing property finance easier for you and your clients. This use of technology isn’t about getting rid of the people behind our business. Instead, it’s about improving the application process to make it as fast and seamless for our customers as possible. This means we’re constantly looking to alleviate the frustrations our customers are most vocal about when dealing with their mortgage applications. For instance, last July we partnered with Onfido to offer our buy-to-let applicants a way to confirm their identity online, without the need for paper forms. By incorporating Onfido’s technology into our digital application system, a photo of one identity document and a ‘selfie’ photo taken with a mobile phone is replacing the need for paper forms and in turn speeding up the identification process. These kind of time savers extend to payments too - we’ve integrated with Stripe so we can accept payment for valuation fees www.mortgageintroducer.com
Ian Boden sales director, LendInvest
online, rather than this task sitting with the case manager and broker to chase the borrower for payment. But beyond technology, how else do we stand out in a competitive market? Let me share with you some of that detail:
signatures, online payment of the valuation fee and digital identity verification making things quicker. You can submit multiple applications easily, with our online multiple application process and case manager support.
Designed for maximum leverage
Flexible criteria
We assess our interest coverage ratio (ICR) at 5% as standard, or 3.6% for our pay rate 5 year fixed, so you can find the best fit for your client. And we calculate serviceability using the market rent, rather than passing rent, to help landlords remortgage where they haven’t increased rents in line with the market because they’re happy to keep a good tenant in place.
Tailored to portfolio landlords
Your clients can mortgage up to 20 properties with us, and borrow an aggregate total of up to £5m. We don’t impose background portfolio limits, and we don’t ask for business plans, cash flow forecasts, or asset and liability statements. Both individual and corporate clients can access the same rates.
Easy to apply for
Apply for our mortgages through our online portal, with electronic
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We offer two pricing tiers to cover your clients’ various credit histories: Tier 1 for applicants with no CCJs or defaults in the last 60 months, and Tier 2 for those with minor credit issues. We accept HMOs – up to a maximum of 15 rooms, with the valuation based on investment value for those above six rooms – and MUFBs up to six units, and borrowers can access the same rates for both standard properties and HMOs.
Taking risk seriously
Assessing risk seriously is at the forefront of our approach to lending. That’s why we recruited Roy Armitage as head of credit when the role was created three years ago - Roy has formidable experience of the lending market, built up over many years, and understands just how to craft thorough and robust underwriting standards.
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Bungalow or entire row? No matter who your clients are, our common sense approach makes Buy-to-Let simple.
It doesn’t matter to us if your client has one or one hundred properties, our process keeps everything nice and simple. In fact, with our lowest ever rate, our award-winning Buy-to-Let mortgages have never been easier.
Call us on 0371 454 2477 or visit togethermoney.com/btl For professional intermediary use only.
No limit on volume or value of properties
Loan Introducer
Comment
Four reasons the buy-to-let market has changed Property has always been a strong investment option, but in recent years, there have been major changes that have made buy-to-let far less attractive to both existing and prospective landlords. The shine may have come off buy-to-let due to this, but there are still opportunities for canny investors in the sector. We look back on the changes below and what this means.
1. Increasing costs
Previously, if a landlord made £10,000 a year on rent but the interest on their buy-to-let mortgage was £9,000, they’d only have to pay tax on the difference: £1,000. From the 2017-18 tax year, however, the amount of interest landlords can claim tax relief on has fallen by 25% a year – that means that by 2020, landlords won’t be able to claim tax relief on any of their mortgage interest. This means some landlords will be pushed into a higher tax bracket, which could make buy-tolet a much less lucrative investment. The costs of buying rental property have gone up too, thanks to additional Stamp Duty charges on second homes. While standard Stamp Duty rules used to apply, now if landlords are buying a second home, they’ll have to pay the going rate any homebuyer would pay if the purchase price is over the Stamp Duty thresh-
“Previously, if a landlord made £10,000 a year on rent but the interest on their buyto-let mortgage was £9,000, they’d only have to pay tax on the difference: £1,000” www.mortgageintroducer.com
Richard Tugwell group intermediary relationship director, Together
old (currently £125,000), plus an extra 3%. This applies to any property or share of a property over £40,000, so Stamp Duty for landlords kicks in at a much lower threshold than for buyers purchasing their own home.
the rest of their portfolio, landlords may start to encounter some problems. Not only could it reduce the number of lenders willing to lend, even if they get a ‘yes’, the process may end up taking longer.
2. Tighter rules
4. Societal changes
In October 2018, the government changed the rules on houses in multiple occupation (HMOs), altering the definition and tightening up licensing. Whereas a HMO used to be classed as a property with five or more people forming two or more separate households and over three or more storeys, a HMO is now any property housing five or more people in two or more separate households. This means more landlords will now need to apply for a HMO licence, which means more hoops to jump through in terms of room sizes and the facilities landlords are expected to provide. New energy efficiency rules have added complications and cost too. Now, just as houses for sale have to display their energy efficiency ratings, rental homes have to meet certain standards too. Since 2018, rented homes must have an EPC rating of at least E, which for many landlords will mean investing in insulation, new windows, and energysaving measures to get their property up to scratch.
3. Clamping down on affordability
Where lenders’ affordability checks used to be limited to the property landlords are buying, new Prudential Regulation Authority guidance states that a landlord’s whole portfolio should be taken into account when making a decision on a new loan. So, while the property they’re looking at may have the potential for great yield, if it just covers costs on APRIL 2019
As “dinner party” landlords abandon ship because of one or more of the factors above, first-time buyers are making the most of reduced competition for property, now making up 50% of the home-buying market. It’s not all bad news for the rental sector however - portfolio landlords are cashing in on a shift towards longer-term renting as multiple career changes and ever-rising house prices force potential buyers to rent for longer. The private rental sector is more popular than ever, with figures from the Office for National Statistics showing a 7% rise in the proportion of Brits renting privately between 2007 to 2017 (from 13% to 20%), and a 9% fall in the number of people buying a home with a mortgage (from 37% to 28%).
Together – lending for the new normal
In an ever-changing market with more and more hoops to jump through, we take a common-sense approach to lending to help landlords achieve their property dreams. We place no limit on the size or value of a portfolio, and there are no rate or fee penalties for portfolio landlords. We’re flexible on income sources too, taking multiple income sources into account, including 100% of rental incomes and pension payments. We can accept applications from limited companies as well as individuals, don’t insist on spotless credit, and have flexible interest coverage ratios to make buy-to-let borrowing more accessible for more people. BUY-TO-LET INTRODUCER
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Comment
Opportunities continue to abound in buy-to-let At the beginning of February, we saw a report from MT Finance suggesting that the majority of UK property professionals were set to expand their portfolios in 2019, despite a backdrop of uncertainty and a squeeze on affordability. Of the respondents, 80% of investors said that they planned to increase their portfolios in 2019, while 20% said they were not expecting to make any portfolio changes over the course of the year. None of the investors questioned planned to reduce their exposure to the UK property market in 2019. A couple of months down the line would the results still be the same? It’s potentially the understatement of the year to say that Brexit negotiations have not gone smoothly, and this shadow of uncertainty has been felt across all areas of financial services. Whilst it is difficult to know for sure if this lingering political ambiguity has impacted property investors, we have seen no real attitude shifts within the BTL sector. Speaking to our intermediary partners its fair to say that while activity is somewhat subdued in the purchase market, demand for remortgage business remains solid. This backs up data from the BVA BDRC Landlords Panel Report for Q4 2018 which outlined that 30 per cent of landlord’s plan to remortgage in 2019. And this is not the only area where opportunities are presenting themselves.
Jeff Knight director of marketing, Foundation Home Loans
Limited companies
The market for limited company lending has expanded, especially in areas where landlords are looking to ensure greater yields - for example HMOs or multi-unit blocks - and there’s growing flexibility in the way lenders are looking at borrowing requirements for limited
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companies. For instance, here at Foundation Home Loans, we accept newly-incorporated companies specifically set up for a purchase, plus we’ll allow up to four directors of that company and there is no maximum age for those directors. This is important for those who have held investment property for some time and want to continue to do this into, and beyond, what might be deemed as a traditional retirement age. A limited company status continues to appeal most strongly to those with 4+ properties, with smaller portfolio landlords much more likely to take a decision on the best strategy for them at the time of a purchase. With professional landlord numbers on the rise, demand to set up limited companies will also present a valuable opportunity for intermediaries. With this type of offering there are obvious tax considerations to take into account, and it’s not the responsibility of advisers to decide on which option individual landlords should take. All intermediaries can do is advise them on relevant BTL mortgage deals and support them in this decision-making process by demonstrating key considerations, together with the pros and cons of setting up a limited company. Borrowing scenarios will be different, and landlords need to ensure they seek relevant independent tax advice from a certified expert if they are unsure of how to proceed. It’s then their decision how they want to move forward, and in what form.
The emergence of specialist lenders
The more complex and detailed underwriting requirements on portfoAPRIL 2019
lio and limited company offerings continues to make it difficult for mainstream lenders to extend their offerings into the more professional end of the BTL sector. The emergence of more flexible, specialist lenders have helped to fill this gap by providing a variety of solutions and offering additional value for larger scale landlords. They have also served to challenge the price discrepancy that once existed to ensure that it is hardly noticeable, or at least very slim compared to what it used to be. The result being a range of highly competitive BTL options being generated which were simply not there a matter of 18, 12 or even six months ago.
Moving beyond the tick-box approach
All of which means that mortgage intermediaries now operating in the buy-to-let space, particularly when it comes to portfolio and professional landlords, now have a far wider array of options available to them and their clients. Of course, this does come with an additional layer of complexity, which underlines how important it is for landlords to deal with specialist advisers and lenders who can assess cases on an individual basis and find a pathway through the complications. The BTL underwriting process is one which has gone far beyond a tick-box approach and its important for intermediaries to realise which lenders incorporate such flexible underwriting values. Once identified, its these types of lenders who will prove invaluable for portfolio landlords and continue to generate additional opportunities within different areas of this sector in 2019 and beyond. www.mortgageintroducer.com
Got a complex buy to let case to place? Solution Found.
With a competitive range of products and rates, flexible criteria and dedicated BDMs, we make finding just the right buy to let solution for your clients our mission. So, for all your porfolio landlord, Limited Company, HMO or short term let cases, turn to Foundation and it’s Solution Found. Just call us on 0344 770 8032 ©2019 Foundation Home Loans is a trading style of Paratus AMC Limited. Registered Office: No.5 Arlington Square, Downshire Way, Bracknell, Berkshire RG12 1WA. Registered in England with Company No. 03489004. Paratus AMC Limited is authorised and regulated by the Financial Conduct Authority. Our registration number is 301128. Buy to let mortgages are not regulated by the Financial Conduct Authority. No limit on portfolio size, subject to maximum borrowing of £3 million with Foundation Home Loans. Calls may be monitored and recorded.
foundationforintermediaries.co.uk
For intermediaries only