October Market Update 2016 Reforms to the buy-to-let mortgage market ALL property investors should be aware of
Dear <<First Name>>
Big changes are happening in the buy-to-let mortgage market, and investors need to be aware so that they can plan accordingly.
The reforms are outlined in a recent Bank of England Policy Statement and come into force from the start of 2017. The consensus among many lenders is that property buyers, or existing owners wanting mortgage finance, should ensure any purchases or any refinance is done this year, because next year is going to be very tough for buy-to-let lending.
The stated aim of the Policy Statement is to prevent a loosening in current industry standards, and to reduce potential losses in the buy-to-let sector. Each firm regulated by the Prudential Regulatory Authority (PRA) must agree an implementation plan, but from 1st January 2017, we understand it may be required that any buy-to-let lending must satisfy a stress test at 5.5% with 140% of rental cover (previously this was generally 5% or lower with 125% cover), unless a long-term fix is taken (fixes of five years and over are exempt from the 5.5% stress test). Portfolio landlords (defined as owning four or more properties) are to have an even tougher test, although the PRA seems to say it is not being prescriptive, so the detail of how this will be implemented for portfolio landlords still needs to be worked out.
In practice this will mean normal 75% Loan to Value (LTV) buy-to-let lending will no longer be available, and the maximum loans will reduce to between 50% and 60% LTV. For lower-yielding properties this percentage may be substantially lower again, due to the 140% rental cover requirement, and for re-mortgages there may no longer be options available.
The effect on values in London is not likely to be particularly dramatic, given the drop in volumes already due to the 3% SDLT increase, hard Brexit concerns, and the number of cash purchases; however investors will need to put more cash into a purchase, meaning some buyers will no longer be able to proceed. Most marginal purchasers are already struggling with the numbers, so the market has driven out high LTV landlords, and we suspect there will be further readjustments when the full effects of the proposed income tax changes start to hit, and buy-to-let landlords get their tax bills in 2020/2021. (A moment of hope: Recent indications from Sajid Javid at UK MIPIM that the government is reconsidering some of the recent property tax changes would be a welcome boost to the market at a time when the economy needs a strong property market. We can only hope these latest politicians show a bit more sense than the last lot! We suggest lobbying your MP to press for removal of the tax on income changes, and also a reduction of the 3% second home SDLT tax.)
Wherever we get to after the 23rd November autumn statement, the government seems to be encouraging larger ‘funds’ to provide supply to the rented sector, rather than buy-to-let landlords, so our view is that this is just another regulatory interference for the market to cope with over the next few years.
Despite all the above, we remain strongly positive about the benefits of owning a residential property asset over the longer term, and with supply levels remaining low and rents continuing to increase for ‘sharer properties’, we see income yields increasing. For those with sufficient cash for 50% – 60% LTV, Temple Field’s Yield Plus investments will generally substantially exceed the more rigorous stress testing, and will provide high-yielding rental investments with minimal void periods.
For more information, a referral to a mortgage broker, or if you would like to discuss your investment strategy with us, please email Ben Temple at firstname.lastname@example.org.
Ben Temple and Dominic Field October 2016
Senior team Ben Temple, Claire Norwood and Dominic Field
Temple Field was formed in January 2014. We provide an experienced independent residential purchasing service for those looking for investments in London. We also offer project management and asset management services. For a full background to our services and experience please take a look at our website:
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