Proper Wealth from the Nova Cafe EP 7 - The Residential Mortgage Market - Nova

Proper Wealth from the Nova Cafe EP 7 – The Residential Mortgage Market

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 7th episode covers the Uk Residential Mortgage Market, Changes, Mistakes and Things to be aware of with Richard Campo from Rose Capital Partners. Click above to watch the 7th episode. Proper Wealth is broadcast on Property TV channel 198 on Sky.

Paul Mahoney:

Today’s is a very special episode, as you’re joining us in a live video link between London and my home town, Terrigal, in New South Wales, Australia. Hi, I’m Paul Mahoney, and this is Proper Wealth, the show where we discuss all things wealth creation, including property.

Joining me today is Richard Campo from Rose Capital Partners. We’re going to be discussing the U.K. residential mortgage market, some of the changes that have occurred, where the market’s going and how individuals can use it to help-

Richard Campo:

I suppose the major change with residential mortgages recently is the Bank of England increasing rates. So on the 2nd of November, I believe, they put the benchmark interest rate up to a half a percent, which was previously at .25. So naturally, that’s had two impacts. Mortgage rates have risen off the back of that, so you’re typically going to find your average mortgage is around about a quarter percent more expensive.

Secondly, it does change the dynamic of the industry, so that’s the first base rate increase we’ve had for over 10 years now. So anyone in that period has never experienced a base rate rise, which is the majority of mortgage owners in this country.

So if you haven’t been familiar with this before, which, obviously, most people haven’t, I remember when I start in mortgages in 1999, it was quite common that rates went up and down. So what you’ll probably find going forward is that the market moves faster.

Banks are quicker to move their pricing. You often might miss out on deals. It’s certainly something we’ve seen in the last two years is there’s pretty much been a downward trend on mortgages. So if people looking around for property in the last two years, it’s not a short period of time, if they come back and review their mortgage at a later date, it’s normally cheaper than it was before. That trend is completely reversed.

So really from this point forward, mortgages will only ever get more expensive. There has been a lot of guidance from the Bank of England, so they think it’s going to be a very slow, gradual movement going forward. The new normal on interest rates will be roughly around 3%, whereas, historically, it was sort of 5%. And they think it will probably take anywhere between three to five years to get to that point.

The big elephant in the room, really, is Brexit, so again, there’s been one benchrate rise now. It’s quite likely it we’ll pause a breath now to see what the outcome of that was, but then it will move forward. So, like I said, that trend of interest rates going down has really, really stopped.

That’s probably the big one. The other bits and pieces, the major other change I think we’ve seen is the stamp duty changes in the budget. So for first-time buyers now, up to £300,000, there’s no stamp duty to pay whatsoever, which is a great holiday. I think that’s going to be reviewed in the next budget in April, but certainly for that period, there’s no stamp duty to pay whatsoever.

We are based in London, so there’s a bit of dispensation for that, so if you’re in a more affluent area or, certainly, a more expensive area, if you’re buying between £300,000 to £500,000, you only pay the difference. So again, that’s only specifically for first-time buyers.

Typically, that will save most people up to £5,000. That’s really quite significant, and again, I think if you put those two factors together, so you’ve got now a lot more first-time buyers with a bit more cash to move, certainly incentive to move, if nothing else, and the rising interest rates. I think that’s going to start the market moving forward with a bit more, certainly, momentum that it had previously.

Also another dynamic we see, maybe more so in London, than in certain other urban areas you’ll find is that because you’ve got first-time buyers coming back in to the market, that frees up first-time movers. So what that’ll prove is a bit of a chain reaction up and down the market. That’s a bit easier to move.

Paul Mahoney:

Oh, interesting, Richard, with regards to, obviously, the change in direction of interest rates, and as you say, a lot of people have never experienced that before in their life as mortgage owners and then also the change with regards to first-time buyers.

I suppose that’s going to have a bit of an impact on the lower end of the market, those buying under £300,000, obviously, are able to take advantage of that change, and that’s very much in line with some of the other changes with regards to buy-for-let recently, so potentially a bit more buying pressure on properties that are sub-£300,000.

But there’s been some talk in the media recently around a fear factor with regards to rising interest rates and more regulation in the buy-to-let world. It’s not something I necessary agree with the logic of in that I think there’s some great opportunities in the market at the moment. In fact, outside of London, the property market’s very much moving forward. But I’d be interested to hear your take on that. Do you think there’s a fear factor in the market at the moment?

Richard Campo:

I wouldn’t say “fear factor” is the right way to phrase that. I think it’s just we’re in an upward curve on rates that’s going to be fairly slow. I understand, certainly, the trepidation around Brexit, and people are fearful of what might happen.

I’m not a political commentator, and I’m certainly not an economist, so I can’t tell what’s going to happen with that. If you look at just the fundamentals of the market, which is really the key thing. So what’s changed, Brexit or without Brexit, in this country, and specifically, in any urban area in the U.K. you can look at, there’s a chronic, a lack of property. There’s just has been for a very long period of time.

So a fear, I don’t really get what that fear is because what’s the fear? Will house prices go down, rates go up? Rates will go up very, very slowly, and there should be a very sort of stable rise up there. If house prices dip, well, it’s like any market.

If you just look on the Lambridge Street data, it’s actually sort of really quite interesting if you do play around with that. I don’t think in London, specifically, it’s a figure I know. I don’t think there’s a period in history, where if you look it over a 10-year window, house prices haven’t doubled in London.

Now it’s not true, the same with the rest of the country because, obviously, it’s [inaudible 00:05:51], a huge amount of demand in London. But certainly that level of growth over a 10-year window is true, so I don’t see what changes with that. I the short term, it’s ups and down. It’s like any market, but fear of a crash or anything, it’s sort of catastrophic. I think it’s a long way off the mark because there’s just simply not enough property.

Paul Mahoney:

I absolutely agree with you there, Richard. It should all come down to the fundamentals, and at the end of the day, the U.K. housing market is massively under supplied. We’re nowhere near meeting the supply requirement on a yearly basis, and whilst ever you have that, that sort of very basic fundamental, the property market will remain strong.

With all these changes that have happening recently, though, I’m a big believer there’s a massively growing need for advice, whether that be buying property or getting mortgages, which obviously relates to you. What’s your feelings on that?

Richard Campo:

Yeah, 100%, people need advice because I think there’s, again, two major aspects of this. So why people need advice is you need to think about who works for you. If you go to a bank, you’ve got a bank adviser who works for the bank. It seems very logical.

And what they’re not going to do, if you walk into the door of Halifax, they’re not going to tell you Santander has the best deal and vice versa. So banks don’t ever have the incentive to tell you that a competitor’s doing better. That’s logical. You can even go one step further, so if you want to compare, which a lot of people do.

So if we’re going to play around with the [inaudible 00:07:05] or the guy with the dodgy mustache, that’s completely cool. A bit worse than mine, I think actually. You can do that, but that will tell you what the cheapest deal is, but it’s not advice. Is that the best deal for you? Is that the best outcome?

A really, simple example I can give you is airplane flights. So do you book the cheapest flight available? Most people don’t because it’s at a really inconvenient time. It doesn’t get you exactly where you want to get to. Mortgages are the same. Sometimes, you want to pay a little bit more for getting the right outcome, so that’s where that advice bit is really important.

And any good financial adviser or broker works for you, the client. That’s why they’re there to advise you. Also as well is once you’ve established it, that you utterly need to protect it.

Paul Mahoney:

Thanks, Richard. That’s all very interesting. Our next question’s with regards to residential mortgages, whether they can be used to invest in buy-to-let. So essentially, remortgaging your home to invest in buy-to-let, a fairly age-old strategy that people have been using for a long time and especially when they’re first getting started. Has there been any changes in that market recently, and what’s your take so far as actually doing that as a way of getting started in the buy-to-let market?

Richard Campo:

Well, yes, you can raise some capital from your main home to buy buy-to-let. There’s absolutely nothing stopping that as long as you have the amount of equity and can afford the loan. It’s like any market at the moment. It is a lot more complex than it used to be. The biggest change is what we call stress tests.

So what a bank used to do is really simple, is as long as your rental payment, sorry, was about 125% of your mortgage payment, banks were happy to lend. Often, in a low interest rate environment, as I mentioned already, rates will rise in future. Banks apply what’s called a stress test. So a really simple scenario is whatever you’re borrowing, most banks assume a rate of around about five and a half percent. They times that figure by about 145%, and that’s what your rent should equal.

That can be quite tough to borrow, say, like 75% on a property, which people used to, so you just need to be mindful about how much money you need to put in to make that calculation work. That’s, again, a standard calculation. Other banks do different things, but if you’re in that starting point, then you’re in a good place.

Also, you need to have your eyes open to the tax position. There is additional stamp duty to pay right now, and you can’t offset all the income tax as well. So just have a good, detailed look about that, and make sure you’re completely [inaudible 00:09:18] with all the costs going in and out because, unfortunately, it is a lot more complex than it used to be.

Paul Mahoney:

Thanks very much for that, Richard. We need to take a commercial break now, but don’t go away. Please join us after the break. We’ll be discussing where the U.K. mortgage market is going moving forward.

Welcome back to Proper Wealth and me, Paul Mahoney. I’m joined again by Richard Campo from Rose Capital Partners. Before the break, Richard shared with us his views on some of the changes in the residential mortgage market and interest rates and things.

What I’m going to do now is ask Richard to get out his crystal ball, tell us where he sees rates going over the next few years, given they have just risen. So, Richard, over to you. Tell us where rates are going.

Richard Campo:

Well, I can, but I think the Bank of England are actually a better guide. Mark Carney, since he came in as the governor of the Bank of England, has been very big on something called forward guidance, so literally telling the market what to expect.

So in the minutes of the last Bank of England meeting, there was a strong indication to expect something like three base rate rises over the next two years. So the Bank of England typically rises rates at a quarter percent, so we’re starting at a half percent today, so what’s that, another .75 on top?

So probably in two years’ time, the bank of England base rate should be circussed at 1.25%, so that’s a very, very gradual increase. So, again, the whole part of this forward guidance thing, it’s just so there’s no surprises. Now, things change.

I’m sure if your inflation keeps picking up the way it is at the moment, they might review that. If Brexit gets a bit messy or not what we want, so they might review that again. But as we sit today, as things stand, that’s broadly the outline.

Paul Mahoney:

Thanks for that, Richard. Very logical. I’d say quite a bit better than a crystal ball, educated guess. Based upon that, though, where do you see the U.K. mortgage market going over the next few years based upon your experience, what you’ve seen in your past and given the change we’ve already discussed? Where is it going from here?

Richard Campo:

Yeah, I think it’s quite positive really, the mortgage market going forward. I think the conversations we have with banks, it’s really how can we learn lend more. So we’ve really seen this since the credit crunch, is the market’s actually very, very simple at the moment. There’s a real lack of innovation, and that’s been the sort of a problem in getting people into the market.

So really, most banks are looking at more innovative ways they can do things, how they can structure deals differently and really looking at clients and what they, more suitable for them. And we’ve seen that in just such a dramatic increase in products.

I think at the lowest point, in 2008, there was something like 4,000 mortgage [inaudible 00:11:52] available. Currently, there’s over 17,000, so that shows you in what is relatively short on a massive increase in choice, but banks still want to go further.

Most banks this year aren’t hitting their targets. Banks want to lend more than they are lending. So again, it’s really about how they can do that in the right shape, how they can navigate all the regulation because banks want to lend. People want to borrow, so it’s just trying to find that point that’s best suited for everybody.

Paul Mahoney:

That’s a very interesting point there, Richard, with regards to banks wanting to lend more. Richard, what would you say is the most common question that borrowers have when it comes to getting a residential mortgage?

Richard Campo:

I think probably the most commonly asked question to most advisers is how much they’re going to borrow. That’s normally the first thing people come out with. So just that as a starting point. The Bank of England actually has set a guideline on this, so most banks are willing to go to around about four and a half times your income, and that whether it be single or joint.

And, in fact, some banks, now will actually include up to four people on an application. So what we’re finding that because it’s difficult to get into the market, sorry, is that people are sort of clubbing together, so friends, couples, and adding other incomes as well because that’s often the best way to get into the market.

That benchmark around four and a times income came about because the Bank of England wanted to slow down lending a bit because they were worried that the market was overheating. So any new bank cannot do more than 15% of its new lending above four and a half times income. So that’s why that became a bit of a benchmark.

Now, because it obviously can’t be more than 15%, by virtue of that, banks can go over and above that figure, but it just gives you a bit of a benchmark to work with. So pretty crudely, if you know what you earn, 4.5 times that. A quite positive change, as well, around the affordability piece is people who have bonuses or commission income.

So most banks will include … If you’ve got say, certainly, a two-year track record, you could include 100% of your bonuses and commission as well, which dramatically increases your borrowing potential. If you are self-employed, like myself, it is a bit more complicated, but again, it’s been some really positive moves around that because banks actually understand if you’re looking at your net income, actually, your borrowing capacity is far greater than someone with a PAYE, for example.

So again, there’s multiple ways we can go into that, which I won’t bore you with, but banks will look at things like your net profit, your profit on ordinary activities before tax. That’s just probably the truest measure of profitability of your company.

And again, companies aren’t always just a big company, such as the one we work for. It could be that you’ve set yourself up as a sole trader or contractor. It could be anyone of those sort of setups. Certainly, the contractors, as well, probably the other segment that we deal with is most banks will now take your daily rate and then apply that.

So what banks will do commonly is take your daily rate, times it by five, times it by 46 and then apply the multiple of four and a half times on top of that. So people typically are either employed, self-employed or a contractor. So if you’re worried about what you can borrow, play around that figure so that gives you a good benchmark. Again, you can go above or below that, certainly, but that gives you something to play with.

Paul Mahoney:

Thanks, Richard. That’s very interesting with regards to the biggest question that people have when it comes to getting a residential mortgage, especially where you say that how certain people seeking out how much they can borrow. And, obviously, different lenders and different products will allow you to borrow a different amount.

So it certainly says to me that the value of seeking advice and exploring the market, rather than going online or just going to your local bank and asking those questions because you may not get a full scope, and you may not be able to borrow as much as you potentially could.

Okay, so my next question is with regards to the biggest mistakes that you see people making. It might be things that they don’t know that they’re doing that might hurt them or just blatant issues that people make for themselves. What are the biggest mistakes people are making when it comes to getting a residential mortgage?

Richard Campo:

Well, I would personally say, from my experience and certainly from talking to a lot of other advisers across the market, the biggest mistake people make is not protecting their mortgage because interest rates are ultra-low right now, as we’ve said before.

The Bank of England’s at .5%, so it’s very common you’d get mortgage rates starting with a one, which is ridiculous. When I started, again, in 1999, if you got mortgage rates starting with a five, that was brilliant. So the affordability bit is easy.

So the biggest mistake you get is not protecting your mortgage. Certainly again, being based in London, we see this, and we see this particularly with more successful people. It’s sort of Superman syndrome. They think it won’t happen to me. But to be crude, Superman ends up in a wheelchair, so it can happen to anybody.

You have to be realistic about yourself and what’s going to happen in the longer term, so I would genuinely say, is just think about the long-term. Think about your plans. Think about your family because the big mistake is not planning for the future.

And again, that goes right down to the extent of actually not buying at all, which I think is a huge mistake people make. I’d challenge anyone to do this. If you look at house prices off the land registry over the last 10 years, there isn’t a period where house prices have gone down. It just doesn’t happen because there’s a chronic supply, sorry, chronic lack of supply of property, and there’s inflation on economy, which is currently running at 3.1%.

So you put a lack of supply, inflation and then increased demand, which we’re going to get next year because of the stamp duty changes. There’s only one way prices are going to go in the longer term, so if people think they’d be clever and outplay the market, you simply don’t. So I would just urge people, buy as soon as you can, that’s affordable and within your means because if it’s a long-term bet, you tend to do quite well out of it.

If you try and ride any market, the property market’s fairly stable. It’s like the stock market. You can’t second guess these things, and don’t treat your home as an investment because think about the alternative. If you’re not going to buy a home, you have to rent or live with your parents. That’s money down the drain every single month.

So if you calculate how much you spend in rent or are spending to your parents and you convert that into what you get in a property, I just can’t see a situation where you’re going to lose in that. And, ultimately, what you don’t want to do is get to the point where you’re retired and you don’t own your home because then, you’re dependent.

And it’s not a very sexy thing to talk about is retirement and planning for that, but you do need to think about it because that’s ultimately what’s going to happen to all of us.

Paul Mahoney:

Okay, Richard. You mentioned before about banks changing their lending criteria and allowing more people to be on the mortgage, so not just one or two people being a couple, which is the fairly traditional way of getting a residential mortgage but whether that be friends or family buying together. Can you talk to me more about that and some the complications that can be had there if people fall out or if they break up. How does that work?

Richard Campo:

Yeah, that’s the big problem of having multiple people on an application. Typically, it tends to be friends. We see it in the main. Say three or four friends will club together and buy a property. What is really important, again, is this is all part of forward planning and why you need good advice is you can preempt the situation because at some point, if it’s friends or even family, for that matter.

At some point, you’re going to sell that property, or you might want to get out. So what you can do is get to something like a deed of trust set up that’s a legal document. It sits with a solicitor, a really, really simple thing, and it just counterbalances those situations.

So if I want to move out, what happens? If I want to sell, what happens? It’s best to always do that at the front end. It’s like fixing your roof when it’s sunny. Do it at that point because if you don’t think about these things, multiple people do go into it and have different agendas at different times in their life. You do really want something that you can refer back to and say that we agreed that in this time, and that just completely negates everyone falling out over that.

Paul Mahoney:

Much for that, Richard, and I absolutely agree. When it comes to financial arrangements, buying property, getting mortgages, you do need to be very commercially minded and realize that sometimes, relationships break down. So you need to cover yourself from a legal standpoint, and make sure you have a very clear understanding of what would happen in that circumstance.

We’ve actually run out of time, unfortunately. But thank you very much for your time, Richard. I’m sure you’ll join us again soon. I think we’ve covered the current U.K. mortgage market quite well and some of the changes and also some projections of what might happen in the future. But to the viewers, thanks very much for joining us again, and join us next time for more discussions on wealth creation with me, Paul Mahoney on Proper Wealth.

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