Proper Wealth - Episode 5: Buy to Let Mortgage Market - Liz Symms - Nova

Proper Wealth – Episode 5: Buy to Let Mortgage Market – Liz Symms

Paul Mahoney:

Welcome to Proper Wealth, with me, Paul Mahoney, the show where we discuss all things wealth creation, including property. Today, we’re going to discuss the buy to let mortgage market, some of the changes and how that’s affecting the overall market as a whole. With me today is Liz Syms from Connect Mortgages.

Liz Syms:

Hi, thank you for having me.

Paul Mahoney:

Thanks for joining me. Liz, I think we should cover some of the recent changes. There’s been quite a lot.

Liz Syms:

Just a few. That’s an understatement.

Paul Mahoney:

And on previous shows, we have discussed how that’s actually affecting the property market. But I think we should also discuss how it’s affecting the mortgage market, and specifically the buy to let mortgage market, even though this show is focused on investments and wealth creation. Perhaps we should go in chronological order and talk about how some of the change is starting to affect the market.

Liz Syms:

Sure.

Paul Mahoney:

So if we start with the stamp duty premium. Let’s talk about that a bit more.

Liz Syms:

Yeah, well obviously what happened is the government decided that they wanted to try and cool the buy to let market. So one of the strategies that they have adopted was to add an extra three percent stamp duty on every second home purchase, with the aim to make it less attractive at the initial point of buy to let investors and hopefully make more property available to first time buyers. There was some unintended, I think unintended, consequences, because as it wasn’t just about buy to let, it was about second homes, so couples that had come together, for example and were then looking to … They each had a property and they’re looking to sell and buy, but keep maybe one and let it out, they’ve been affected as well. So even people buying their own residential home, in some cases, have been affected by this second property tax.

Paul Mahoney:

And also upgrading and keeping their first home.

Liz Syms:

Yes, exactly that.

Paul Mahoney:

We’ve seen quite a lot of that as well.

Liz Syms:

Exactly that. And I think that’s had a bit of an effect on the home mover market. So whilst it’s had the desired effect with more first time buyers, the actual home mover market has slowed. So not sure whether that was totally the consequence they were looking at, but there are some things that landlords can do or look at. So for example, if they look to extend the torts of properties they’ll considers into the commercial market, that doesn’t apply, the extra stamp duty doesn’t apply in the commercial market. So it means that they can still buy a 250,000 pound commercial investment and let it to a business, rather than an individual and only pay 2,500 in stamp duty, as opposed to 7,500. So that’s one of the strategies we’ve seen our clients adopt.

Paul Mahoney:

And it also applies to mixed use property.

Liz Syms:

Absolutely.

Paul Mahoney:

So for example a shop on the ground floor and a flat above.

Liz Syms:

Yeah, and that’s a great way for somebody that’s used to doing just buy to let mortgages, to actually get into the commercial market. So softer entrance where there’s some element of buy to let mixed with the retail, the shop for example. Yep.

Paul Mahoney:

With that shift, I suppose with more people potentially looking to avoid that stamp duty premium, potentially investing more in commercial or mixed use, I suppose that’s resulting in more demand in that area from a mortgage perspective is it?

Liz Syms:

Yeah, absolutely. And so mortgage advisors like ourselves that are involved in that market are seeing more and more inquiries. However, I think for most buy to let investors, there are some definitely that are going down that route and see commercial for other reasons as well as beneficial, which we’ll cover off. But I think for a lot of buy to let investors, it’s also very much “Well, okay. This is a cost I’m now gonna wear.” And that one, the stamp duty one, is now pretty much business as usual. And whilst it’s still a bitter pill, it’s kind of been forgotten about a bit with all of the other changes that have now come into play.

Paul Mahoney:

Well, I suppose if an investment doesn’t stack up and have more of a buffer than three percent in the first place, it’s probably not worth making anyways.

Liz Syms:

I agree, yeah. If the three percent is something that’s going to put somebody off, it probably isn’t a great investment if it doesn’t stack up including that three percent. Absolutely, yeah.

Paul Mahoney:

That’s interesting to see how that stamp duty premium is affecting both property and the mortgage side of things. Have you seen commercial mortgages come down in rates, or more products become available at all, because of that?

Liz Syms:

Absolutely. There are new entrants into the commercial mortgage market. You’ve typically got two camps in the commercial market. You’ve got your high street commercial lenders. So your big high street names that everybody will know. And then you’ve got what we call the challenger banks. So where the high street will maybe just do a repayment mortgage, maybe low loan to value, 60%, the challenger banks will come in with interest only, more flexible terms, and will potentially look to 70, 75%. So and there’s more of those that have come into the market fairly recently. So it’s an interesting time.

Paul Mahoney:

Yeah, that’s interesting. Okay. Alright, so we’ve covered stamp duty, or the stamp duty premium. Then we had section 24. We have section 24 starting-

Liz Syms:

The start of it.

Paul Mahoney:

Starting to now come into play. What changes have you seen that cause on the mortgage side of things?

Liz Syms:

I think the first thing is obviously it affects anybody that holds a property in their individual name. They will no longer be able to fully offset all of their mortgage payments against their rental income for tax purposes. Because the tax relief will be restricted to 20%. So if they are a higher rate tax payer, they are effectively going to be paying more tax on their properties. It can also affect basic rate taxpayers who will still get that relief, but the way it’s calculated, it can push a basic rate taxpayer into the higher band. So it can cause an effect on that, and on benefits and things like that as well.

Paul Mahoney:

My understanding in that respect is it’s your employment income plus your property income that will determine your band.

Liz Syms:

But it’s gross property income, because of how the calculations actually work. So it’s being phased in, as you know, over the next four years. So this is the first year. So I think landlords are aware of it, but they actually haven’t seen how that’s going to affect their pocket as yet. So there are some tools on the government website where people can put in what number properties have got, what their tax band is, what their income is, for it to give some kind of indication of what they can expect, which I think every landlord should be looking to do. But there are some other strategies that some of our landlords are using in relation to limited company purchases because they will still be able to benefit from the actual full offsetting of the mortgage interest.

Paul Mahoney:

Yeah, I read an interesting stat recently, actually, that said before section 24 was announced, only five percent of buy to let mortgages were from limited companies and in the final quarter of last year, nearly 70% were.

Liz Syms:

Yeah.

Paul Mahoney:

Massive difference there, isn’t it?

Liz Syms:

I think it is. It is a massive increase. It has become a very popular way, but really you need to look at it … That 70% is actually mostly about purchases because if you take both purchases and remortgages, the limited company percentage drops. Because you can’t remortgage from an individual name into an limited company because they’re two separate entities. So it has to be a sale and purchase between the two of them.

Paul Mahoney:

And that’s quite costly, isn’t it?

Liz Syms:

That can be if the people don’t get the right tax advice and they really need to-

Paul Mahoney:

You’re looking at things like capital gains taxes, and stamp duty-

Liz Syms:

Stamp duty at the higher rate, and so on. So there are ways that people can navigate through that if they get the right advice, but any new purchases, those are the ones we see where it’s gone massively towards the limited company route. Absolutely.

Paul Mahoney:

Yeah, and I supposed certainly what I’ve seen is that’s been mostly the people who are on the higher tax brackets that are worried about-

Liz Syms:

Or close to the higher tax bracket.

Paul Mahoney:

Or very close, yeah.

Liz Syms:

Yeah.

Paul Mahoney:

Okay, that’s interesting. Have you seen that affect the limited company buy to let mortgage market?

Liz Syms:

Yeah. So prior to this happening, there was a premium for limited companies. So a lender might charge one percent more if you were buying through a limited company, than if you’re buying through your individual name. But because there’s now more competition for that type of deal, more landlords are actually looking at doing this. And lenders want to earn business. We’ve now seen most lenders where actually whether you’re buying in individual name or whether you’re buying in limited company name, the pricing is the same. So there’s greater competition, better pricing for limited companies, and again, more lenders coming into this market to take advantage that they can get some more market share from that.

Paul Mahoney:

Yeah, that’s interesting. I suppose before it was a niche, wasn’t it?

Liz Syms:

Yes.

Paul Mahoney:

And now with so many more products, so much more competition, those rates have come down, or the ability to charge that premium has come down.

Liz Syms:

Yeah, starting to become more mainstream. Absolutely.

Paul Mahoney:

Yeah, okay. And from the perspective of the amount of people investing through limited companies, in your experience, what do you think the ratio is there? So if people buying in their own name, and buying through limited company?

Liz Syms:

Well, I think through new purchases, as you highlighted, definitely, probably a good 70% are buying. But if you’ve got somebody who’s just got one or two properties and they’re in the lower tax band, then a limited company may not be the right route for them. Because there are costs to running that limited company, and how it’s taxed, and how you can access your money from a limited company are also things that people need to consider. So is it right for everybody? Well, that’s why I come back to saying “Go and get some proper tax advice.” Because once you’ve got the mortgage in place, either individually, or in a limited company, it’s quite hard and costly to change it. So getting that advice and doing it right before you buy is absolutely key.

Paul Mahoney:

Yeah. Well, I think the common theme through this show has been getting advice is key, in anything you’re doing in what are fairly life changing decisions. Property, it’s a life purchase. It’s generally one of the largest purchases people will ever make. So doing that right is pretty important.

Liz Syms:

And it might not be your local accountant that normally does your business books that is the right person to get tax advice about property from, because it’s a very specialist area.

Paul Mahoney:

That is a really good point, because there are lots of accountants that aren’t even necessarily familiar with these changes. So understanding property specifically would be quite important.

Liz Syms:

Yes, definitely.

Paul Mahoney:

Excellent. Thanks very much, Liz. Join us after the break for more discussions on the buy to let mortgage market changes and how that’s affecting property overall.

Paul Mahoney:

Welcome back to Proper Wealth. Today we’re discussing the buy to let mortgage market. And my guest is Liz Syms from Connect Mortgages. So before the break, we discussed the stamp duty premium changes, the section 24, and I think now we should discuss the PRA changes and the two sides to that, how that’s starting to affect the market, because they’re quite recent changes, aren’t they?

Liz Syms:

Absolutely. Yeah.

Paul Mahoney:

So perhaps if we start with the change that occurred in January of this year.

Liz Syms:

Yes, yes. So PRA, Prudential Regulated Authority, are the party that regulate the lenders. Or certainly some of the lenders. Any of the lenders that take retail deposits as part of their funding, they’re regulated by the PRA. And the other lenders are regulated by the FCA. And they were tasked by the government to, again, look at ways of cooling the buy to let market so that didn’t cause another credit crunch of the sorts in the buy to let market.

Liz Syms:

So the first topic that they decided to tackle was the affordability side of things. We’ve already talked about the stamp duty and the tax. The tax is likely to increase people’s cost on their buy to lets going forward. We’re at a low interest rate environment at the moment, so that’s only really got one way to go. So they just wanted to make sure that as costs start to go up in the buy to let market, that that had been factored in. So in January, they brought in the first of the rules relating to the affordability. So set in stone that lenders need to make assumptions that the interest rate rise is going to go to five and a half percent, and that the rent can cover payments at a five and a half percent interest rate rise. And then on top of that, to factor in additional costs of running the portfolio, like the extra tax costs, and rental voids, and management fees and things like that. And that’s when you get that additional margin.

Liz Syms:

The PRA were very prescriptive on one part of that, which is they have to calculate what the interest costs would be at five and a half percent. But the margin part of it, for voids and costs, they left for lenders to make a decision on. And that’s why you see a variable, where some lenders want 125% coverage, some want 145, or 150, because they’re all interpreting themselves-

Paul Mahoney:

Making brokers lives difficult.

Liz Syms:

Making brokers lives difficult because they’re all interpreting themselves what that margin should be in certain circumstances. So if somebody is buying through a limited company, and won’t be affected by the tax, the lender’s going “Okay, we won’t need such a big margin. And maybe we can go for 125.” Whereas somebody’s still carrying on and buying in their individual name, they’re going to be affected by those tax changes. So therefore, they’ll want a higher margin in place.

Paul Mahoney:

Okay. Right. And it’s been interesting to see how that’s affected how much people can now borrow.

Liz Syms:

Yes.

Paul Mahoney:

Whereas, certainly in London in the southeast, previously, it was quite easy to borrow 75%. And now it seems to be more like 50 or 60% being the maximum in lower yielding areas.

Liz Syms:

Yeah, definitely in low yielding areas, it can restrict the maximum loaned value, but there are things that landlords can do. So the rules allowed for lenders to use a different calculation in certain circumstances. One would be if the interest rate was being fixed for five or more years. Because on that basis, landlords are not going to be affected by the rising interest rates. So we’ve got lenders, for examples, with five year fixed rates around the three and a half percent mark, and they’re allow to do the calculation based on that three and a half, rather than five and a half. So that is one way to look at it.

Liz Syms:

There are other lenders that do what we call top slicing. So they’re saying “If the rent doesn’t fit, then actually we’ll look at your income and if you have some surface income, we’ll use that to make up the shortfall.” So there’s a couple of innovative things that some of the lenders come out with to help navigate through that particular piece as well.

Paul Mahoney:

I suppose good reason to seek advice.

Liz Syms:

Yeah, and absolutely coming back to one of the reasons people were looking at limited companies was from a tax point of view, but actually, because the lower rental calculations for a limited company, that’s a second reason why limited companies are actually popular as well.

Paul Mahoney:

Okay. That’s interesting.

Liz Syms:

Yeah.

Paul Mahoney:

Okay, so we have that serviceability change, or extra regulations around serviceability. Do all lenders need to follow that?

Liz Syms:

No because the PRA just regulates those deposit taking lenders. Although the ones that are regulated by the FCA, they’ve been directed to follow the PRA, but there’s still a small number that sit outside of the FCA and these are the lenders that just offer buy to let. So they don’t fall into the regulation with the FCA because they’re not doing a residential offering. They’re only offering buy to let. So they have the flexibility to actually offer rental calculations that are slightly different to the mainstream lenders that are affected by the rules.

Paul Mahoney:

Sort of your specialist buy to let lenders.

Liz Syms:

Definitely some specialists, some of the newer lenders, and so on and so forth. However, some of them may have a parents that is regulated by the FCA. Or they may be looking to get regulated by the FCA or the PRA at a later point. So therefore, they don’t really want to go too far beyond, but it’s a useful tool to know if a landlord does need a little bit of flexibility on those rental calculations, which lenders are able to offer up.

Paul Mahoney:

Yeah, it certainly seems like all these changes are making things quite a bit more complex in what, up until quite recently, I would say was quite a DIY type industry.

Liz Syms:

Yes, yeah.

Paul Mahoney:

Property investment in general, you know? People go on Zoopla, they find a property they like, they buy it, and then they go to the bank to get a mortgage. Not quite that simple anymore, is it?

Liz Syms:

No, I’d like to say that everybody needs to get advice from a specialist mortgage advisor who can actually help them navigate through this, because there are a lot of choices and options.

Paul Mahoney:

Okay, excellent. Alright, so we covered the first PRA change now-

Liz Syms:

That was the easy one.

Paul Mahoney:

That was the easy one. Now the most recent one, very very recent. Let’s talk about the portfolio landlord changes.

Liz Syms:

Yep, so just to be clear, the first change affected every landlord, okay? So regardless of how many properties. If you’ve only got one property, or if you’ve got 100 properties, you were affected by that first change. The second change, however, only affected what they call portfolio landlords. The PRA identified that anybody who had a portfolio are likely to be more at risk from some of these tax changes and other changes in the marketplace. So then they defined what a portfolio landlord is, which is basically anybody with four or more mortgaged buy to let properties, take-

Paul Mahoney:

That’s an interesting point. Let’s just touch on that.

Liz Syms:

Yeah, sure.

Paul Mahoney:

So if you have two mortgaged buy to let properties, and three unmortgaged ones, does this change affect you?

Liz Syms:

No, because you’re not classed as a portfolio landlord, unless they all four, including the one you’re trying to finance, are mortgaged.

Paul Mahoney:

I think that’s interesting to clarify in that the way these changes are worded a lot of the time, people tend to get a little bit confused, I think, on misconceptions. So that’s an interesting point.

Liz Syms:

The other thing to bear in mind though, as well, is unfortunately, in this circumstance, the limited company piece doesn’t get you out of the portfolio change. So if you hold a property as a share of a property, I.e., jointly with somebody, or because you’ve got an insider limited company and you’re a shareholder or director of that company, that is counted towards your four. But your main residence is not counted towards your four, okay?

Paul Mahoney:

Right.

Liz Syms:

So once you sort of understand that, then you can look and see whether actually are you affected by this portfolio landlord [inaudible 00:19:53].

Paul Mahoney:

You know, to me, that change actually made quite a lot of sense. I think a lot of landlords are a bit worried about it, or I think everyone’s worried about change in general. But so if I was a lender assessing your whole portfolio, rather than just the one they’re lending on, in that you can have one great property you’re buying now, and three terrible ones, of course those three terrible ones are going to affect the success of the one you’re buying, overall.

Liz Syms:

Yes.

Paul Mahoney:

Or your financial situation, anyway. So it kind of makes quite a lot of sense. It’s pretty sensible, I think.

Liz Syms:

Yeah, so effectively what the PRA said is if you identify somebody as portfolio landlord, you need to apply specialist underwriting, which means you have to look at the whole circumstances, not just the subject property that’s being financed. So what that means is actually, we’ve now got two rental calculations. So we have the first rental calculation being done in the way that was brought in in January, but now the lenders are also having to what we call stress test the background portfolio and say “If the mortgage interest of the background portfolio was to increase, will the rent payments still cover it?” So you could have a situation, as you’ve just highlighted, where the subject property’s absolutely fine, but the background portfolio doesn’t meet those requirements of the lender, and therefore, they can’t lend.

Liz Syms:

But they were also directed to do things like look at somebody’s strategy and their business plan. So how does that new property fit in with the background portfolio? Actually, does it enhance the situation? And also to look at how the landlord is going to be able to cope in the future with things like changes. So the lenders are sometimes asking therefore cash flow projections, for example. But it’s interesting that again there’s some flexibility around this. So the PRA have made suggestions, but they haven’t made black and white rules. So you’re getting lots of different interpretation again, lender by lender, which means whilst one lender might say “No, it doesn’t fit for us on the background portfolio,” the next lender might say “The way we calculate it, it works.”

Paul Mahoney:

Okay. So it seems a lot of these changes are looking to professionalize the buy to let market, certainly more reason to get advice given the extra complexity, and I suppose probably more importance on yield than previously.

Liz Syms:

Yeah, I think so. But there are still some investors, as you know, that look to purchase certain properties for growth, more than yield. Where lenders can actually accommodate that is they can ask for also an asset and liability statement. So if a background portfolio or a subject property is not potentially performing as the stress test would dictate it should, if the landlord has got other assets, maybe commercial property, because that sits outside of all of these rules, or maybe some investments in stocks and shares, so they can demonstrate that they can weather the storm, so if the increase tax costs, rates, and so on-

Paul Mahoney:

So essentially different ways around it, different ways of dealing with it.

Liz Syms:

Yeah. Lenders can take that view with the right flexible lender.

Paul Mahoney:

Excellent. Well that’s all we got time for now, but those were some great points there.

Liz Syms:

No problem.

Paul Mahoney:

I’m sure a lot of our viewers learnt an awful lot from that chat. Thank you for joining us on Proper Wealth, with me, Paul Mahoney. Join us next time for more discussions on wealth creation, including property.

 

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