Proper Wealth from the Nova Cafe Ep 10 - The Buy to Let Mortgage Market from a Lender’s Perspective - Nova

Proper Wealth from the Nova Cafe Ep 10 – The Buy to Let Mortgage Market from a Lender’s Perspective

Hosted in the Nova Cafe by our Managing Director, Paul Mahoney, Proper Wealth explores all aspects of wealth creation with a specific focus on Property. This 8th episode covers the Liverpool Property Market, changes in Liverpool over recent years, the gentrification and infrastructure underway and why it is a good place to invest with Alex Doonan from Acentus Real Estate. Click above to watch the 8th episode. Proper Wealth is broadcast in Property TV channel 198 on Sky.

Paul Mahoney: Welcome to Proper Wealth, with me Paul Mahoney. The show where we discuss all things wealth creation, including property. Joining me today is Daniel Owen-Parr from Together. Welcome, Daniel.

Daniel O-P.: Thank you.

Paul Mahoney: Let’s start with a general chat about the topic of the episode. So the buy to let mortgage market from a lender’s perspective. There’s obviously been lots of changes recently. They seem to be being perceived in different ways with different people. How are lenders viewing the changes?

Daniel O-P.: So at the moment in time in the market place there’s been a number of changes that have hit over the last couple of years. The market itself seems to be buoyant still, so there still seems to be a lot of activity going on. Buy to lets seem to be the mind of a lot of individuals still, so I don’t think … I think there’s opportunity in the market still, but I just think there’s going to be a few changes over the next few years that may dampen it down slightly.

Paul Mahoney: Okay. Yeah, so there does seem to be some mixed messages, doesn’t there? And it’s a little bit difficult, I think, for individuals at the moment to get a clear picture on what’s happening. Perhaps we can touch on what each of the changes that have happened recently, and how each of them are being perceived. So overall, I suppose we had Section 24, referring to the way that buy to let mortgage interest is being treated from a tax perspective. We had the stamp duty premium of 3% being introduced. Change with regards to the way that lenders look at mortgage serviceability, and then also changes in regards to the way lenders look at portfolio landlords. And then, of course, we have Brexit in the background as well. So quite a bit to consider at the moment. If we start with Section 24, how is that impacting the market at the moment, and how are lenders looking at it?

Daniel O-P.: I think with all those changes, pretty much, that you’ve mentioned there, it affects the amount of money has got to service their debt, and also the profit they make at the end of it, so I think with any change to taxation, or with any change where they’re going to restrict that amount of money they’ve got at the end of the month to pay either their lifestyle, or that they need for paying the mortgage debt is going to cause some issues in the long run, so that one, to be fair, it’s been here now for a couple of years, and I think if they’ve spoken to their accountant, looked through that and made sure they understand the full ramifications, because it’s tapering now over a number of years, and I think the final date is the 20/21 annual tax return, which will really have a full effect then when it goes down to basic rate tax. But as long as they’re planning for that going forward, as long as they understand their mortgage payments, then that shouldn’t be too much of a problem now, because it’s been going for a couple of years.

Paul Mahoney: Yeah, I absolutely agree. I think it would be surprising how many people don’t know how Section 24’s going to affect them. This is obviously the first year that it’s started to be rolled into effect, so I suppose a lot of landlords will start to feel how it might affect them at the end of this year, and then more and more so over the next four years. But, absolutely, good guidance so far as them understanding how it will affect them when it’s fully in effect. Okay. With regards to stamp duty, from a lender’s perspective, does that affect things at all?

Daniel O-P.: Once again, it will really affect the individual’s cashflow, and that’s the real importance to understand that, and it’s not quite simply just 3%. It’s worked on a tiered basis, so you’ve got to be careful if you just think it’s just 3%. The more expensive the property is, so, for instance, if you were to purchase something around £275,000, it’s not just 3% of 275,000, it tiers on a number of levels up to one and a half million, so you’d be paying around £12,000 stamp duty for that second property, or, if it’s in a company name, the first property you put in a company name. You’ve really got to understand your cashflow from day one, that can you afford the stamp duty, which wasn’t there a couple of years back, so when you were purchasing, have you got enough to afford the deposit? Where now, you’ve got to take the facts you’ve got the deposit, you’ve got the legal costs, and then you’ve got the stamp duty going on top of that. So growing a portfolio now will be slightly more expensive than it was prior to this.

Paul Mahoney: Yeah, okay. So obviously touched on Section 24 affecting serviceability essentially, a yield being more important, the stamp duty affecting your initial capital costs, and then I suppose that affects what value properties you’re buying. Another one we mentioned was mortgage serviceability overall, so the way that lenders are viewing that. I suppose they all kind of tie into each other a little bit, don’t they?

Daniel O-P.: Yeah, yeah, very much.

Paul Mahoney: And there does seem to be a trend with all of these changes mostly, well, more so affecting higher value lower yield properties. Do you have any views on how that’s going to affect the country geographically?

Daniel O-P.: Well, if you think of somewhere like the South East, London, into the home counties, what you see there is normally higher cost properties with slightly lower yields, and that will affect it, because the return you’re getting on your property on a monthly or annual basis will be reduced significantly if you have to then take into consider the Section 24 changes, serviceability around how much you can afford on a loan, so the regulations have changed now that it’s quite standard across the whole industry, so the potential authority has come in there and set out some fairly stringent guidelines around 125% of the rental yield to lend at, and they also [inaudible 00:06:05] that comes in with it as well.

Daniel O-P.: You’d have to be careful that the lender would probably restrict the amount they would lend on that property, so you would probably have a much lower LTV, or loan to value in something like that.

Paul Mahoney: So making it more difficult to borrow what you previously would have been able to borrow in those sorts of locations. I think that’s quite interesting, and I suppose potentially the shift that that could cause. When you look at the fact London, historically, has been the safe haven, not just of the UK, but almost the world, you know, the financial center, and now it’s becoming more and more difficult to actually justify a buy to let purchase in that sort of market. I suppose that has to benefit other areas in some way, because people are still buying.

Daniel O-P.: Yeah, very much so, and you’ll see around the country that where London was the center of everything, now people are moving out and they’re looking for areas where they’re going to get a better yield. So, for instance, somewhere like the North East, Humber area, Liverpool where they’ve got lower cost properties, but they’re getting a much higher yield, they are now becoming slight hotspots. Across the north of England, Birmingham, they’re seeing more and more landlords moving from the London area out to these areas.

Daniel O-P.: And, also, people moving out of your standard terraced housing or three bedroom semis, moving into HMO type properties, student lets, holiday lets, Airbnb for instance. Landlords who are moving from the standard tenancies into Airbnb, where they’ll get a higher yield of the back of it. So it is changing the markets, these changes now.

Paul Mahoney: Yeah, well that’s another shift, isn’t it? It’s trying to avoid that Section 24 change going into commercial property as opposed to residential, or, as you say, trying to boost their yields a bit to deal with it. It’s quite interesting. Another trend that seems to be happening at the moment is not just the shift in buyer demand, but also the shift in where people want to live in the UK. You mentioned places like the North East, the North West. Someone ran me through an interesting example the other day, so far as a young professional trying to buy in London, and it’s very difficult. That same young professional could go up to somewhere like Manchester or Liverpool and buy a city center penthouse apartment for 400 grand. Can’t buy anything in London for 400 grand, so it kind of makes sense as to why that person might move to a location like that.

Paul Mahoney: We mentioned Brexit briefly. Do you or lenders in general have any view on the impact that’s having, or what impact it might have?

Daniel O-P.: I think, at the moment in time, it’s the uncertainty that’s the issue. I think for any lender, anybody in business, any landlord, you’ll want a certainty of regulation, of taxation, and where the government’s going to be going. So, at the moment in time, with the uncertainty this affecting purchasing decisions, so am I going to invest in property, or am I going to keep my money, theoretically, under the mattress to a certain degree? So what we would like is consistency from the government. We’d like them to come out and set out the stall about what will happen after the D-day when we leave sort of March next year. We’d really like to know what what they would be and how that will be painted.

Daniel O-P.: So I think for landlords, I would expect some of them would take the decision to rather keep the cash for now, and see what happens after March next year. So we may see a slowing down in the marketplace.

Paul Mahoney: It’s all very much speculation at the moment, because no-one actually knows what Brexit is, do they?

Daniel O-P.: No, no, and that’s the difficulty.

Paul Mahoney: I think it’s also interesting that, probably based on political views, some people are viewing it as a real positive, whereas other people are viewing it as a real concern, so I agree, it will be really interesting to find out what Brexit is when it actually comes about. One thing we didn’t cover so far as the changes is portfolio landlords. How are those changes affecting things?

Daniel O-P.: So that’s been coming to the market now for a little while, so, basically, anybody that’s got four properties or more is now classed as a portfolio landlord, and you’ve got to treat that slightly differently, and quite rightly as well. We don’t want to go back to the pre 2008 issues we had with landlords, so at the moment in time now, rather than just looking at an individual property in its own right, you’d want to be looking at the overall portfolio and the affordability across the portfolio. You’d want to be looking at the experience of the individual. You’d want to looking at making sure that they can afford it now, but also can afford it in the future as well.

Daniel O-P.: I think there’s a number of changes that have come in that are right for the industry, but it’ll take a little bit of time, because a number of portfolio landlords will be rolling off long term deals now, which were done pre 2008 and onwards into a new regime now, and they may find the number of lenders that will be able offer them a loan decreasing, so there’ll be a little bit more opportunity for the specialist lending market to come in and have a look at these portfolios.

Paul Mahoney: Look, I absolutely agree about it making sense. I think with everything that landlords have been hit with lately, any change is easily perceived as negative ones, but I don’t think anyone logically can agree that it makes sense to look at your whole portfolio when lending as opposed to just one property, because that one could be great and your others could be terrible, and it certainly seems that so long as landlords do have portfolios that work, then they shouldn’t really be too negatively affected by that change, just a bit more information they need to provide.

Daniel O-P.: Yes. I think a lot of these changes also are professionalizing the industry, and that’s one of them. Simple things like keeping a portfolio schedule to understand some very basic information around the value of the property, when it was last valued, what the rents that are coming in each month, and as long as you keep something up to date on that, most lenders will be quite happy to look at that, but the number of lenders out there will probably slightly less than they were previously that’ll be looking on portfolios.

Paul Mahoney: Sadly, that’s all we’ve got time for in this part of the show, but don’t go away, because we’ll be back.

Paul Mahoney: Welcome back to Proper Wealth, with me, Paul Mahoney. Joining me again is Daniel Owen-Parr. So, Daniel, we spoke before the break a lot about the changes in the market, and how they’re being perceived by both landlords and lenders. Perhaps we can recap on that a little bit and talk about some of the challenges, but also the opportunities in the current by to let market. So if we start with the challenges. We spoke about some challenges around yields and also property values. How are you perceiving them impacting the market?

Daniel O-P.: I think at the moment in time with Section 24, with the stamp duty changes, it restricts the landlord’s ability for larger deposits, or their yields that they’re receiving, that may be used to pay their mortgage payments, might be slightly less. So it’s for the landlord to really look at what they’re receiving in, and making sure that it’s affordable going forward. So I think it’s there for landlords to maybe speak to their accountants, and really work out and understand their portfolio now with these changes.

Paul Mahoney: I suppose one of the challenges is the requirement for professional advice that perhaps wasn’t as much of a requirement previously.

Daniel O-P.: I think it’s best advice, as a lender, we would want people to be speaking to their accountant, getting that really professional proper advice to understand how these changes will affect them in a personal way.

Paul Mahoney: Yeah, okay. So accountants, mortgage brokers, property professionals, there’s a range of different services out there, isn’t there? Okay so that’s some of the challenges. Now onto the fun stuff, the opportunities. So what would you say are some of the opportunities in the current market?

Daniel O-P.: I think the opportunities sit there very firmly for entrepreneurial landlords. There’s a lot of property out there at the moment in time, and there’s a real supply issue around the standard stuff, which are your terraces and your three bedroom semis, but around some creative landlords you could look at maybe converting former commercial or semi-commercial buildings, looking at former commercial properties that have never any use relating to residential, so something as interesting as a former toilet or something like that, that could be converted into residential, or looking at what property they currently have where they can extend or maybe even go into a little bit of development themselves and actually create property.

Daniel O-P.: So I think there’s a lot of opportunity around looking at different sides at the moment in time, not just your standard two up, two downs, or three bedroom semi.

Paul Mahoney: Yeah. There is a lot of talk around the professionalization of the industry, isn’t there? And I suppose landlords are looking for different ways with dealing with these change, whether that be higher yielding, lower value residential areas, moving into commercial space, as you say, perhaps getting a bit more creative with development. Not sure about living in an ex toilet, but there’s a whole range of things happening, isn’t there?

Daniel O-P.: Yeah.

Paul Mahoney: I suppose another interesting thing is the broad range of lenders out there, and how they approach the market, how they view the market. So if we could talk about the difference between high street lenders and more specialist lenders and the spectrum in between.

Daniel O-P.: Yeah, so we can talk a pre 2008 and the main lending was done by your clearing banks, so your main lenders out there that you’ll see on every high street in the UK were probably predominants of the market, but over 2008 and onwards, there’s been a rise in the specialist market, so you’re looking at short term lenders, challenger banks that have come into the market, peer to peer lending, private lenders, so the market has grown dramatically over that period of time with a number of lenders coming into that space who will offer different products or different solutions to clients now, so the likelihood of them going to the bank as their first port of call is less likely nowadays.

Paul Mahoney: Okay, and I suppose that’s another opportunity, isn’t it? All these different types of lenders that didn’t exist not so long ago offering more solutions.

Daniel O-P.: Yeah. I think, in one way, there’s a lot more solutions out there in the market, but for individuals who are not au fait with the market, they’re going to have to get advice, because there’s so many different lenders and varying different ways that they will look to raise capital for clients to help them fund their buy to let, so taking advice. Once again, we spoke before about your accountants, your mortgage brokers, people like that, that’s where you’d need to get some advice.

Paul Mahoney: Well I suppose it’s very difficult as any individual, regardless of the level of experience or knowledge, to have such a broad scope of understanding of what’s available, so I suppose that’s where professionals come in handy, isn’t it?

Daniel O-P.: Yeah, yeah, very much.

Paul Mahoney: It’s giving that resource and that knowledge. Okay. So some of the things that are new in the market. We spoke about some changes. One of the changes we didn’t cover, one of the most recent ones being with regards to EPC requirements. How are lenders viewing that?

Daniel O-P.: So that’s come to us very recently, so from the 1st of April the regulation was changed about what can be used as a buy to let property, so if you’ve seen a valuation recently, you will have seen on the back of it an EPC rating, starting from A all the way through to G. The new regulations dictate that anything that’s E to A can be rented out as normal, F and G you can’t rent out. So there’s a lot of opportunity in there for people to pick up buy to let properties, do some work on them, turn them into a property that can go onto the market, but you need to make sure that you understand that as a landlord, because you can be fined by your local council, or, in the worst cases, you can actually be banned from renting property out, so really important that you understand where your property is and if it needs any work doing to it, and that’s where a good surveyor would be able to talk to through that and how much you need.

Paul Mahoney: I found it quite interesting that lenders are actually now … Now have to actually review that. I think a little in the past, people probably found that quite easy to get away from the council and get away with those sorts of things, but then when it comes to get a mortgage, if you don’t have the ability to prove that you’re meeting those requirements, well you’re not going to get one, are you?

Daniel O-P.: No, no, not at all.

Paul Mahoney: So that gives you more reason to make sure that you’re aware of those sorts of things, which is obviously very important.

Daniel O-P.: Yes.

Paul Mahoney: Another trend in the market seems to be the permitted development rights, you know, conversions of office to residential, or commercial to residential property. Again, there seems to a mixed view on that from both a buyer’s and a lender’s perspective. Do you have any views on the PDR, and how that’s impacting the market?

Daniel O-P.: There’s been a real growth in that over the last few years. The government changed the regulations a number of years back, but it’s taken a little bit of time for that to grow. As a lender, you would really be making sure that an individual purchasing a larger commercial building to convert would have the experience to do that, or has done has development, because it can normally take a fairly large project to turn a commercial building into a residential, and a number of factors you need to take into consideration.

Daniel O-P.: So we talked earlier on about bringing the professionals in, so in this circumstances you’d really be looking to them have a team of very experienced individuals, architects, planning, to make sure they understand how much it’s going to cost to convert that across. And then as an individual purchasing out of a PDL project, most lenders will look at a property, a larger property, maybe a block of flats, as a concentration risk, so making sure that they’re not overexposed in one area, so we haven’t got too many units charged to them. So things to be taken into consideration when doing PDL.

Paul Mahoney: Okay. All right, so obviously from the development side of things, just recapping what you’ve said there, lenders looking at the experience of the overall team to make sure they can actually deliver. I suppose that’s probably something that’s quite important for the end buyer to be looking at as well.

Daniel O-P.: Yes.

Paul Mahoney: Especially if they’re buying off plan or something like that, which obviously is happening quite a lot at the moment. These buildings are bought, sold off plan. In the right circumstances that seems to work quite well, and obviously in the wrong circumstances that can work quite badly. So everybody involved needs to be confident that it’s going to the right outcome. And then that’s interesting from the buyer’s perspective where lenders are looking at that, I suppose lenders are always looking at limiting their risk, aren’t they, on a certain building.

Paul Mahoney: Would you say, is that also partly dependent on where the buildings are and where lenders see the demand for those properties?

Daniel O-P.: I think you get certain areas where there’s a very high concentration of conversions or blocks of flats, then a lender would look at that to make sure there is the demand to meet that supply. At the moment in time, we’ve got an under supply in the UK, so there’s not too many areas with that issue, but it’s something to take into consideration, is the number of projects all going on in one area. You just want to make sure that the lender will want to be in that market and there’s demand for that.

Paul Mahoney: Yeah. I suppose that’s the reason for these permitted development rights changes is to increase the supply of residential property in the UK, so, overall, it certainly seems to be quite a positive thing, quite a positive trend, but certainly quite a few things to consider there.

Daniel O-P.: Yes. With anything when you’re dealing with property, always do your research. I think that’s the major thing to do there, and use your professionals, and make sure that’s somewhere that, A, you want to live and you can commute with good bus, train routes to where you work.

Paul Mahoney: Yeah, okay. Do you have any examples of where you’ve seen permitted development rights or the conversions work really well?

Daniel O-P.: Well we’ve seen there’s a number of these around the country, and that could be anything from turning old, redundant warehousing into student lets, or it could be straight into something as a residential flats, so I think there’s a number of them around the country, and if you think of any city center hotspots, could be central London, around the Canary Wharf area, all the way up to Newcastle, Edinburgh, places like that, so I think it’s good that we can take redundant properties in most cases, or quite tired properties and turn them into something new that can used for number of generations to go.

Paul Mahoney: Yeah, and some of them can now be really highly desirable properties, can’t they?

Daniel O-P.: Yeah, very much.

Paul Mahoney: Especially those old grade two listed warehouses, they can end up being really cool places to live. I’ve seen some of those being done really well.

Daniel O-P.: Yes, definitely.

Paul Mahoney: Sadly, that’s all we’ve got time for today. Join me again. I’m Paul Mahoney, and this is Proper Wealth.

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