Proper Wealth from the Nova Cafe EP 3 – Best of Buy to Let

Hosted in the Nova Cafe by our MD Paul Mahoney, Proper Wealth explores all aspects of wealth creation with a specific focus on Property. This third episode covers Tax Changes, Stamp Duty Changes and Mortgage Changes with Ben Wilson from Best of Buy to Let. Click above to watch the third episode.

Paul Mahoney:

Welcome back to Proper Wealth with me, Paul Mahoney. Today we’re going to be talking about the current UK property market, some of the changes that are occurring, and how that’s affecting both the market itself and the people involved. I have Ben Wilson from Best of Buy to Let joining me. Thanks for joining us, Ben.

Ben Wilson:

Thanks for having me, Paul.

Paul Mahoney:

Ben, the current market. I suppose … Let’s start on some of the changes. There’s been quite a few.

Ben Wilson:

There have. Yes, absolutely.

Paul Mahoney:

Which is causing some uncertainty I’d say. Perhaps if we just touch on what those changes are to start with.

Ben Wilson:

There are a number, and there have been over the last few years. There have been a number of changes to the stem duty brackets, as well as the initial freedom stamp duty. There have been changes to the portfolio, the mortgage side if you are a land owner of numerous properties. And the tax change overseas as well.

Paul Mahoney:

Okay. Yeah, so I suppose, firstly the mortgage interest deductibility for Buy to Let mortgages. We then have the 3% Stamp GD Premium. We had some changes with regards to the way that lenders look at mortgage serviceability. Then most recently, some changes with the way lenders look at portfolio landlords. So, I suppose they are the four big ones. A lot of people probably don’t know how that is going to effect them specifically.

Ben Wilson:

Exactly. Absolutely. I think it is important to … Yeah, a lot of landlords don’t know … It’s the fear of the unknown. I think it is important that people read up and get to know what’s what and what’s going to effect them and what’s not going to effect them.

Paul Mahoney:

Yeah, okay. Well, let’s start with the mortgage interest deductibility. How’s that effecting things?

Ben Wilson:

Well, before you use to be able to deduct the mortgage interest from your … The full mortgage interest amount from your tax. So it was fully tax deductible. Some of it is tax deductible. It is being phased out slowly but surely depending on what tax bracket you fall in. There are various different ways it’s going to effect you.

Paul Mahoney:

Yeah. So that started this year, didn’t it? The phasing in.

Ben Wilson:

It is. Yeah, absolute.

Paul Mahoney:

So I suppose people would just start to feel those changes and how it is going to effect them at the end of this tax year. With these complexities, I suppose advice is becoming more important.

Ben Wilson:

It is, yeah. It depends on how highly leveraged you are and what’s the yield you’re achieving. Some people are going to be quite heavily effected and other people probably not so much at all. It’s going to be the median landlord. The landlord with 5-15 properties is going to be most effected. The landlord with one or two, probably not so much. The landlord with 20, 30 plus properties, again not so much because they are not going to feel pinch quite so heavily. It’s the median landlord who’s really going to feel the pinch on such.

Paul Mahoney:

That’s a good point actually. So you spoke about leverage and how that effects that change and also people’s tax position. I think a common misconception with that particular change, is that mortgage interest is just no longer tax deductible at all.

Ben Wilson:

Yeah, which isn’t the case.

Paul Mahoney:

Which, of course, isn’t the case. For those who are on the basic rate of tax, a lot of them actually won’t be effected.

Ben Wilson:

No, not at all.

Paul Mahoney:

I think perhaps that that’s due to the way that the change is worded and also the way it’s been sort of portrayed in the media.

Ben Wilson:

Yeah, absolutely.

Paul Mahoney:

So understanding how that particular change is going to effect an individual is probably pretty important.

Ben Wilson:

For sure. I think it’s a fantastic headline to say we’re scrapping mortgage interest completely. When, like you say, it’s not that. It’s just doving deeper into and making sure you fully understand it.

Paul Mahoney:

Yeah. Yeah.

Ben Wilson:

And that’s why I say the landlord of one or two isn’t going to jump into the higher tax bracket and if we’re not … and is not effected too much. But if it suddenly pushes you into a higher tax bracket, that’s where it’s really gonna hit you.

Paul Mahoney:

Yeah. Okay. So that’s the first change. We then spoke about the second change. A 3% Stamp GD Premium for any property purchases beyond your first. How do you think that is effecting things?

Ben Wilson:

I think the … Depending on where you are and what you’re purchasing. Now if you purchase something in over a half a million pound, it really hits you in the terms of the amount you’re paying. An extra has been 15, 20 thousand pounds plus on a transaction, really eats into your yield or your return. If you’re purchasing something lower in the market, an extra few thousand pounds, you can probably swallow. So it really depends on what price point you’re purchasing at.

Paul Mahoney:

Because it’s on top of the current threshold, isn’t it? So, as they increase with the higher value properties, the extra 3% starts to hurt more and more.

Ben Wilson:

Exactly. The new brackets that came in about 3 or so years ago, meant anything below a million pounds, you generally save a little bit of money on. Anything above a million pounds, it really hit you quite hard. So if you see, … If you’re a [inaudible 00:05:03] person who sent me a million pounds plus as a rental property, and you got an additional 3%, or say a million pounds it takes you 30,000 pounds on top of that, it’s a huge amount of money if you’re paying for one transaction. In my opinion, it really doesn’t make sense in most cases.

Paul Mahoney:

Yeah. Okay. So I suppose the higher value properties are being hit most, whereas the lower value properties doesn’t hurt as much.

Ben Wilson:

Exactly. Can a landlord stomach an extra 2 or 3 thousand pounds or 4 thousand pounds for a transaction, they probably can in most cases if the numbers stack up. A million pounds, can you stomach an extra 30,000 pounds? Well, you probably can’t afford to if you’re buying at that price point because the numbers stack up. I’d say in most cases probably not.

Paul Mahoney:

Yeah, fair enough. There are also seems to be quite a strong appeal against that Stamp GD Premium at the moment. So far, as I was reading the other day, the government actually raised quite a bit more than they expected. So maybe, I don’t know who knows, but maybe there is a change on the horizon for that.

Ben Wilson:

The government seems like changing it every other week. Well, not every other week but you know, every other budget is a new thing on the property market is to try and slow it down or to create a new headline. And it is a fantastic headline. I think that some people have build up portfolios for a good number of years. Ten, twenty, thirty years. They’ve created wealth and created a small business for themselves. There is probably a bit of anger for those people who’ve spent some time, money, and years to building up this wealth to something to be hit hard by it.

Paul Mahoney:

It will be interesting to see if there are any further changes to property, especially with Brexit and everything on the horizon. I’m sure parliament is probably pretty busy.

Ben Wilson:

I’d say so. Absolutely. Yeah.

Paul Mahoney:

Okay. So, we’ve come to the 3% Stamp GD Premium. We also mentioned the changes to mortgage serviceability so banks making sure that people are very much stress testing their portfolio lending. Not so much portfolio, any lending. I suppose that’s effecting lower yielding properties.

Ben Wilson:

It is. There have been a large number of changes probably over the last 10 years since 2007, back in 2007 when the credit crunch happened. There have been a large number recently in the last 6 to 12 months again. It’s making sure that they really are … If a crash were to come again, making sure that there is enough serviceability there so landlords can cover themselves. It’s the lower yielding properties again. The ones that are just washing their faces that are really being hit again most. The large deposits that need to be put in there just to make sure that lenders are happy to lend on that particular property.

Paul Mahoney:

Yeah. And I suppose that is kind of restricting the level of lending on lower yielding properties as compared to before. I think there is potentially a bit of a risk there for people who have been borrowing higher amounts on low yielding properties in the past that potentially won’t be able to borrow as much as they could in the past now.

Ben Wilson:

Yeah, very much so. I remember when I bought my first [inaudible 00:08:00] property 13 years ago, you put down a 10% deposit, the rent was at 125% at current interest rate and away you went. It was fairly easy. Now, it’s a minimum of 25% to get a half decent interest rate and the test they do are quite strict and quite rigor. So, yeah.

Paul Mahoney:

Okay. Finally, we spoke about that final change, which was only just 30th of September. So very, very recent. With regards to the way that lenders look at portfolio landlords, so those with 4 or more properties. It’s probably too soon to see how that’s effecting things but how do you think it might affect things moving forward?

Ben Wilson:

It’s a good question. One we haven’t thought the answer to yet but it certainly, I imagine it will have any effect of some sort. Like you said, we are only 3 weeks into it so it’s difficult to say just what’s going to happen. It will be … It will certainly … The way people structure their … How they purchase properties will certainly have … you mentioned they’re pretty good and slightly creative where they bring in family members or husband, wives buying, set it in different names. What they do will be interesting to see.

Paul Mahoney:

I think overall it kind of makes sense, the fact that lenders are now looking at a portfolio landlord’s whole portfolio rather than just the property their lending on.

Ben Wilson:

I guess it is common sense. If someone’s portfolio is performing well then you are happy to lend and if one or two are not performing so well, you take that into account as well. Look, it is common sense but also new and therefore-

Paul Mahoney:

I think with anything, when changes like this come into place, it’s quite important for landlords not to over react to the outcome.

Ben Wilson:

Yeah, absolutely.

Paul Mahoney:

Because certainly that final change we’re talking about there, it’s seem a lot more straight forward than a lot of people I’ve been speaking with sort of are perceiving it.

Ben Wilson:

Yeah. I think with any change ever comes and we take 6 to 12 months just to bed in and settle down. It’s worth just taking a backseat and just to see what happens in the market, see what the lenders’ response to are, see what the investors’ response to are, and then making a judgment call from there. Now the market, nothing may happen. But one or two things will happen and also, within that time period, one or two [inaudible 00:10:05] a new administration may come in as well, working at to see whether something comes in from there.

Paul Mahoney:

Okay. Alright. So we spoke about the four changes. Bit of extra tax for some landlords with high borrowings, bit of extra stamp duty for some as well, and more to consider from a borrowing perspective. How do you see that impacting the UK property market?

Ben Wilson:

It’s a good question as well. When I first started in the property market 13 years ago, the focus was London. It always generally had been. You’d buy in London, the yields were okay, never amazing but okay. They can’t be very full cost or always fantastic and they always have been. London’s generally doubled in value every 8, 9, 10 years even through the credit crunch. You choose a 10-year period and it’s doubled in value. It’s moving away from that now I’d say. The capital growth full costs aren’t as strong as they were due to Brexit, due to the election, and the uncertainty around those two points. The yields just been so low. The yields at the moment, on average in London, are generally between two and four percent. Look, there are obviously abnormalities outside of that but generally it’s between two and four percent, which means you need to put so much money into a particular unit for it to just wash its face. So if you’re putting a couple hundred thousand pounds into a property and spending 30, 40, 50 thousand pounds on stamp duty, that’s a quarter of a million pounds just for a unit just to wash its face a little bit more.

Paul Mahoney:

Yeah. Okay.

Ben Wilson:

So therefore people, in my opinion, are going to start looking outside of the areas. Now whether that be student towns or whether that could be at areas that are outside there that are regeneration areas, or potentially areas in the north of England, where there are lower value properties, high yielding assets and with stronger capital growth full costs.

Paul Mahoney:

Let’s suppose if you’re getting the high yield and the low value, little bit of extra tax doesn’t hurt you as much because you’ve more of a buffer. You’re buying a lower value so the Stamp GD doesn’t hurt as much and serviceability doesn’t become an issue either because you’ve the higher yields. I suppose that kind of makes sense.

Thanks very much for that, Ben. Lots of value information there.

That’s all the time we’ve got for now. Join us after the break for more of a discussion on specific locations and how you can actually take advantage of some of these changes in the market to benefit you as a landlord.

Welcome back to Proper Wealth with me, Paul Mahoney. Joining me is Ben Wilson from Best of Buy to Let. Thanks again, Ben.

Ben Wilson:

Thanks, Paul.

Paul Mahoney:

Before the break, we spoke about the UK property market. Some of the changes that are happening and how it’s effecting the market in general. Now we are going to talk about some specific locations, areas that are being hurt and areas that are actually benefiting. So Ben, if we start with the areas that are being hurt by these changes, can we talk a bit about that?

Ben Wilson:

Sure. I would say the biggest one that is being hurt is London. When you were investing years ago and years ago when I first started investing in property, the premier location you would always think of was the capital of the UK where the city is, where Canary Wolf is, where the West End is. It was a safe place to invest. Capital growth as always been strong and the yields were good. That’s where you would always lean towards. I’d say that’s probably where it’s been hurt most. The prices now are so high, the entry point is so high, the stamp duty bracket … The stamp duty you are going to pay is incredibly high. The yields, the rents haven’t quite stayed at the same pace the property prices have so therefore the yields are so low. The capital growth full costs simply aren’t as strong as other places in the UK due to Brexit, due to uncertainty within the city because of the election and Brexit, and other factors as well effecting them.

Paul Mahoney:

Yeah, okay. So the higher values, the lower yields, and I suppose it’s interesting how that happens, isn’t it? Because rents are so closely linked to incomes, no one borrows to pay their rent. Therefore, rent can only go so far beyond income growth, whereas everybody borrows to buy property in general. Therefore, I suppose property prices aren’t really linked to incomes, are they?

Ben Wilson:

They are in a way but I guess people push themselves or stretch themselves because it’s an investment as well. But also, whereas you are only ever going to rent one property, some people may buy, own 2, 3, 4, you know 10 properties cause you’re buying a home then you’re buying various number of investment properties. Therefore, you’ll stretch yourself to buy those properties whereas you’re only going to rent one property per household. Unless you own a holiday home for example. The chances are you going to have one rental property per household.

Paul Mahoney:

Yeah. Okay. So the fact that we’ve got the higher values, I suppose that’s being hurt by the change, the lower yields is also being hurt by the changes. London being the safe haven, historically anyway. How you finding that people are kind of perceiving that? Is that something that everybody understands or is it a growing level of awareness?

Ben Wilson:

Yeah, it’s a good question. I think some people are very aware and some people are very switched on aware of the changes that have been and the thinking being that they need to look outside of London. Some people are still very much fully focused at London’s the place to be and haven’t quite got their head around the fact that actually probably outside of the capital is the place to be now. They just think that London can’t go wrong and it’s the place to be. I think the proof will be in the pudding in a few years time when if you have or haven’t invested outside London and how that’s effected you.

Paul Mahoney:

Yeah. Yeah okay. I suppose high level people might still be thinking London is the place to invest but perhaps when they come to logistics of actually buying, you know, how much cash they will need to put in, the level of borrowings they can actually get, the stamp duty they are going to have to pay, and whether that property actually washes its face after all of that.

Ben Wilson:

Yeah, exactly. When you invest in London … So, when I first invested in London years ago, you put in up 10-20% and now you need to put a minimum 25% and that’s before we’ve got to serviceability. As a generalization in London, you need to put in about 50% there or there abouts. If you’re buying something about half a million pounds, which is clearly gonna get you a one bedroom flat in most parts of London, and not even that in some parts of London, you’re putting in 250,000 pounds before you’ve got the stamp duty, before you’ve furnished the flat, and any other surveillance fees, solicited fees, and any other fees. So we’re looking at 300,000 pounds plus just for a property that washed its face.

In other parts of the UK, you can buy four or five properties with that money with leverage. Therefore, if you buy four or five properties that are gonna make money versus one that is not gonna make money, if you are putting those numbers into a spreadsheet and comparing the spreadsheets, common sense tells me that London, at the moment, probably isn’t the place to be.

Paul Mahoney:

Okay. Alright. So, we’ve spoke about London, the South East, being hurt. You’ve just pointed out there that there are other areas that potentially are benefiting from these changes or the shift that’s occurring in the market. Where do you see that shift going?

Ben Wilson:

It’s a good question again. We’re seeing a lot of the shifts going up North for various reasons. There’s the new HS2 and other regeneration projects going up North.

Paul Mahoney:

Yeah. Northern Powerhouse seems overall, I suppose.

Ben Wilson:

Northern Powerhouse in general, exactly. If we are looking a specific locations, we pretty looking at Manchester or Liverpool as the main two. Manchester benefited hugely. Of course, we’re just behind that but we seeing it as having similar infrastructure to Manchester. I think that it’s probably got a lot of way to go. So probably, those are the two main areas that were seeing in terms of the areas where see people investing.

Paul Mahoney:

Okay. So the focus is shifting from London and the South East, previously being the focus, more so toward the North, predominantly the North West from what you’re saying there, places like Manchester and Liverpool.

Ben Wilson:

Exactly. If you look at the typical flat that you are buying in either of those two areas, you got a low entry point. You can buy, pick up a couple of 2 bedroom flats for 100 to 200 thousand pounds. So for the stamp duty you’re paying is nominal in comparison to what you were spending in London. Also, the yields are much higher. If we’re generalizing again, we’re looking between 6 and 8%, which means the serviceability is much higher and mortgage companies are much happier to lend you money and also re-lend you money in a couple years time if you want to refinance, if the property has gone up in value. Makes life a lot easier for getting your money back out and putting it into another investment whether that be property or something else.

Paul Mahoney:

So this shift kind of makes a lot of sense, doesn’t it? If you can earn a simpler amount of money in the North, whether it be Manchester or Liverpool, and have much lower living costs, and buy a nicer property in a nicer location, then why wouldn’t you do it?

Ben Wilson:

Absolutely. You can afford to live in the North these days with a similar amount of money or even less than London just because the living costs is so much greater living in London. The cost of rent or mortgage, of course the land, everything else alongside rather it’s a gym, rather it’s a car, everything tends to be much cheaper up in the North. From an investment point of view, it just tends to make more sense going the North at the moment. Look, I love London but a numbers point of view, it makes sense to go up North from my point of view at the moment. Now that’s not to say it’s always going to be that way. It use to make sense to invest in London. But moving forwards, for the short term at least, I would suggest it makes sense to go up North.

Paul Mahoney:

Okay. So we’ve spoke about the North there in general. We’ve touched a little on Manchester, you know. Absolutely bustling city, so much happening there. I suppose all the kind of fundamentals that people generally want to look for when it comes to property investment, we mentioned Liverpool as well. Now, something I’ve found quite interesting is Liverpool. Because I think, perception wise, a lot of people think of it as a, you know, there’s not really much happening there.

Ben Wilson:

Yeah, that really isn’t the case at all. We were there only a few weeks ago, you walk around the city and it gets like Manchester, it’s buzzing. You walk down the Keys, there’s loads of regeneration gone. It’s quite a small city, Liverpool but lovely. There’s building work going on all over the place, beautiful buildings. Some really old architecture, stunning buildings and like London has. It’s really on the up, really on up-

Paul Mahoney:

Some of the numbers, just from recent reports on Liverpool, so far as it being the fastest growing city for employment growth, and also the fastest growing city for economic growth. The economy there grew by 15 odd percent last year.

Ben Wilson:

Yeah and-

Paul Mahoney:

Pretty incredible.

Ben Wilson:

Yeah, it really stacks up, it really does. You can see why the capital growth full cost is strong there as well. Just for the businesses that are there, the business that are moving there. The growth is happening there as well.

Paul Mahoney:

Completely agree, Ben. Also, infrastructure spending in Liverpool is pretty impressive. They’ve got massive amount of infrastructure going on. The Peel Group is doing two very large infrastructure projects, which are mixed use, commercial, residential, retail, which will probably double the size of the city in Liverpool. As you say, at the moment, it’s a relatively small city, but it’s expanding to the North. It’s also expanding across the river, which will be really interesting to see how that plays out over the next 10 to 15 years. I suppose, on top of that, it’s about 20 to 30% cheaper than Manchester and Birmingham-

Ben Wilson:

Yeah, it really is.

Paul Mahoney:

From a couple of price prospectives.

Ben Wilson:

It is slightly … I’d say at least 20 to 30% cheaper than Manchester and Birmingham, which means the yields are slightly higher. Just cause their rents are a similar amount but the prices are cheaper, which means your entry point is cheaper. I think just touching on what you just said, in terms of the infrastructure spending that’s going on in the North and the West, we really are seeing that the center of Liverpool is getting further and further North, just with all the infrastructure projects … The spend and the regeneration projects that are going on in the North of Liverpool. You take a walk around there, you know, 10 years ago pretty grotty again in the North of Liverpool, in parts. You have a walk around there now and you can see that the changes are happening and see how fantastic it’s going to look, not too long in place of time.

Paul Mahoney:

Yeah. So it’s almost a bit of a two-speed market, isn’t it? You know, we have London in the South East cooling off and plateauing a little bit. I think a lot of people, especially those that live in London in the South East just assume that’s the case UK wide but it’s really not.

Ben Wilson:

No, it’s not. If you look at stats, the North of England really is doing well. Now look, it’s not booming by any stretch of the imagination, we are not in the 2006, 2007 market but it’s a steady growth. It’s performing well and we expect it to continue to perform well. City growth is probably the best way to have it, rather you’re gonna get peaks and troughs. So we are in a city market at the moment so where’s London, like you say, is plateaued slightly and especially at the higher end of the market, million pound plus, it really has dropped off and really is slow and it really is tough to the property at the moment if you’re above a million pounds.

Paul Mahoney:

There we go. I think that was a great description of what’s happening in the current UK market.

Thanks very much for your time, Ben.

Ben Wilson:

Thanks, Paul. Thanks for having me.

Paul Mahoney:

And thanks very much for joining us on Proper Wealth. Join us next time for more discussion on wealth creation.

 

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