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Buy-to-let must be long game to make a profit

Despite rising costs, landlords could see net profits of more than £265,500 on their properties over 25 years, research has suggested. One Savings Bank calculated the profit, which is £162,000 when inflation is taken into account, and suggested buy-to-let could therefore still be a good bet for investors, although the research showed higher-rate tax payers will generate nearly a quarter (24 per cent) less than basic-rate taxpayers.

Returns also vary significantly by region, with profits in London more than £307,000 over the period, far greater than the UK average.

John Eastgate, sales and marketing director of One Savings Bank, which carried out the research, said that with a 25-year investment, a basic tax paying landlord, placing a typical 3 per cent deposit of £73,908 on a property, would generate a total profit of £265,500 after all costs and taxes.

Accounting for the impact of inflation over the period, this represented a profit of £162,000 in today’s money, or £6,475 every year.

He said: “The buy-to-let market is undergoing a sea change.

“Regulatory and taxation changes have altered the market dynamic, reducing its attractiveness to amateur landlords, and increasing the tax bills of higher-rate investors. In spite of rising costs, there are still healthy returns to be found in property for committed investors.

“However the days of speculation are gone. It is a long-term business endeavour, requiring commitment and expertise.

“Investors must be prepared to undertake business and tax planning, understand the risks as well as the rewards, and, most importantly, the responsibilities they have towards their tenants.”

The figures show that the cost of investing for 25-years amounts to £373,000, including more than £100,000 in tax.

A significant proportion of landlord returns over this period would come from capital gains, but the research suggested that most properties would also make a profit on rental income that more than covered outgoings.

The figures follow a sustained campaign by the government to reduce the attractiveness of buy-to-let investment, which has included increasing the amount of stamp duty payable on investment properties as well as decreasing the amount of tax relief available on mortgage interest payments.

As a result of the changes, investment into buy-to-let has dropped significantly in recent years with figures from the Intermediary Mortgage Lenders Association (Imla), in February, showing net investment in buy-to-let property fell from £25bn in 2015 to just £5bn in 2017 – a steeper drop than was seen immediately after the credit crunch in 2008.

Bob Riach, principal of Riach Financial in Scunthorpe, said that although interest had slowed down in the area, it still stacked up financially.

He said: “The average price of a buy-to-let here is about £120,000, with rental income of £550. It is viable, but the stamp duty surcharge has made it less popular.”

Source: FT Adviser

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UK House Prices see worst drop in over 8 years

The housing market has undergone peaks and troughs, with values in traditionally expensive regions dropping between 2017/18. The first quarter of 2018, specifically March and April, saw average house prices fall to their lowest in over 8 years. Overall, prices fell by over 3.1%, or nearly £221,000 according to a news report by Bloomberg.

The study by Halifax, part of the Lloyds banking group, demonstrated that the UK market is weakening. Meanwhile, consumer interest wanes due to a decrease in mortgage approvals overall. But while the first quarter is a poor start for the market, increases to the job market may redress this.

House Prices at 8-year low

Halifax also found that while mortgage approvals and buyer interest had depreciated. So too did the number of houses being placed on the market, contributing to a wider decrease in market value. For both London and the rest of the UK, the spring season is uncharacteristically quiet compared to other years.

“We are entering what is supposed to be the busy spring buying season, which tends to set the tone for the rest of the year.” – Jeremy Leaf, N. London Estate Agent (The Guardian)

Decreasing values are affecting housing across the UK, with London homes falling to prices of £430,000 or below.

Source: Gooruf

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Landlords can make £162,000 profit per property

The typical landlord would see an estimated net profit of over £265,500 per property over the next 25 years, through rental income and capital gains, according to Kent Reliance.

The lender said that in today’s money, that’s £162,000, or nearly £6,500 per property per year.

This is despite huge challenges faced by landlords in recent years, including the Stamp Duty surcharge, changes to income tax and tighter mortgage lending rules for landlords.

Where does the profit come from?

Capital gains comprise a significant portion of a landlord’s returns. Assuming that house prices and rents rise in real-terms by 1% per year – well below their performance over the last 20 years – over the 25 year period, this would mean an average buy to let property would grow in value to nearly £516,000, providing gross capital gains of £269,464.

A typical landlord also receives rent of £10,134 per year per property, based on current yields, and accounting for void periods, each year. Over the course of a 25 year period, a typical property would generate a total rental income of £369,495. Based on this, even if a landlord did not sell their property, making no capital gains, income alone would not only cover outgoings, it would provide a profit of over £65,500.

Costs of being a landlord

Buying, running, and eventually selling an investment property is not without its costs. Kent Reliance has worked out that total costs amount to just over £373,000 over 25 years, equivalent to 58% of the total income and capital gains a landlord would enjoy.

Tax is one of the largest costs. Over 25 years, the typical basic rate taxpayer landlord will contribute approximately £99,600 per property to the Treasury’s coffers: over £60,000 in capital gains tax, £29,000 in income tax, and nearly £10,000 in stamp duty.

For higher rate taxpayers, the burden is heavier still following the recent changes. They can expect to pay three times as much income tax as basic rate landlords – nearly £88,000.

Mortgage finance costs are the largest cost for a typical landlord, at a total of £157,000. However, as the mortgage debt does not rise each year, it represents a smaller proportion of the property’s value, and a smaller proportion of monthly income each year. Landlords will typically spend a further £72,000 in the maintenance and running costs of a property, excluding any improvements. The research also factors in an opportunity cost of over £34,000, the return an investor could have made from long-term savings instead.

John Eastgate, sales and marketing director of OneSavings Bank, said: “The buy to let market is undergoing a sea change. Regulatory and taxation changes have altered the market dynamic, reducing its attractiveness to amateur landlords, and increasing the tax bills of higher-rate investors. In spite of rising costs, there are still healthy returns to be found in property for committed investors.

“However the days of speculation are gone. It is a long-term business endeavour, requiring commitment and expertise. Investors must be prepared to undertake business and tax planning, understand the risks as well as the rewards, and, most importantly, the responsibilities they have towards their tenants.”

Source: Your Money

 

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Most home buyers would use a mortgage broker

The majority of home movers and first-time buyers would use a broker to secure their mortgage, according to Legal & General’s Mortgage Myths campaign.

The Legal & General Mortgage Club’s research found that four out of five UK homeowners (81%) who bought a property in the last 12 months would use a broker if they were securing their mortgage again.

Meanwhile, three-quarters (75%) of those intending to buy their first home with a mortgage  in the next six months would be likely to seek the advice of a broker.

Consumers are also more likely to use a mortgage broker if they have specialist circumstances:

  • 71% would be likely to seek advice from a broker if they had a poor credit rating
  • 62% would turn to use a broker if they were self-employed or worked as a contractor
  • 67% would speak to a broker about buy-to-let mortgages.

More than half (53%) of respondents who had made a recent home purchase said they used a mortgage broker because it gave them access to a wider range of mortgage deals. Consumers have access to 30,482 mortgages compared to only 3,408 products for those who go direct to a lender, according to mortgage sourcing firm Trigold.

A third (33%) of respondents said using a broker removed the hassle of filling out forms and applications, while 36% felt brokers provided them with reassurance of talking to someone.

Kevin Roberts, director of Legal & General Mortgage Club, commented: “These figures should come as a positive message for mortgage brokers across the UK, showing that there is clearly a recognition amongst consumers about the value of professional advice, whether they are an existing homeowner, a first-time buyer, a borrower with a complex income or a prospective landlord.

“However, while this is clearly positive news, there are still buyers out there that either remain unware of the role of a broker or who have misconceptions about the value they can provide. As an industry, we need to reach out to these consumers and use campaigns like Mortgage Myths to showcase the important role that brokers play in helping borrowers across the UK.”

Source: Mortgage Finance Gazette

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Will the Bank of England raise rates in August?

With the Bank of England declining to raise interest rates in May, the question now is when will it take action?

Toward the start of the year, May had been tipped by market watchers and analysts as the month in which the Bank of England (BoE) would start hiking the base rate. However, those expectations started to disappear in April, with GDP growth figures disappointing and inflation dropping to come in closer to target.

But despite choosing not to raise rates this time, the BoE remains positive on the UK economy and expects to continue raising rates this year.

It attributes the first quarter of 2018’s slowdown in growth to adverse weather, expecting GDP growth to rise to 0.4 per cent in Q2, with year-on-year growth coming in at 1.75 per cent. Likewise, it forecasts inflation to come in at 2.4 per cent in Q2 and has lowered its forecast for inflation in two years’ time to 2 per cent, from 2.2 per cent.

With this in mind, the BoE is still committed to ‘ongoing tightening of monetary policy’ – just not starting in May.

So, if not now, when?

According to Dan Hanson of Bloomberg Economics, we should expect a rise in August, assuming growth rates start to improve. ‘If growth rebounds as we expect in Q2, the next increase in interest rates is likely to come in August,’ Hanson notes.

Pantheon Macroeconomics also believes an August rate rise is a strong possibility, albeit far from a certainty. ‘On balance, we still think the odds of an August rate hike slightly exceed 50 per cent,’ comments the economic research consultancy.

Another factor supporting a rate rise is the Bank’s desire to gain the space to cut rates again if it needs to, in the face of any unforeseen economic shocks. To regain this option, it will need to raise rates further, and the timeframe in which to do so is narrowing.

According to Pantheon Macroeconomics, ‘the window of opportunity for raising rates could disappear after August, as May will have to decide in Q4 whether to leave the EU’s customs union. Whatever decision she makes will anger one wing of the Tory party, potentially triggering a leadership challenge or a general election.’

Raising rates in such a political environment may not be possible. Therefore, the BoE may feel compelled to take action, raising rates before political instability surfaces.

A rise, however, is far from certain. Unexpectedly bad economic data could easily force the bank to delay rates. ‘It would not take much more sub-par activity data for the Monetary Policy Committee to wait a little longer.’ Pantheon Macroeconomics is therefore only ‘pencilling in an August hike.’

Source: Money Observer

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The weakest link in the UK housing market right now

This morning, we return to our favourite topic – the UK housing market.

The news this week has all been bad for people who think that high house prices are a good thing.

Or to put it another way, it’s been mildly promising for people who think that the national quality of life would be vastly better if we didn’t have to spend quite so much time worrying about the colossal, unforgiving chunk of variable-rate debt – or the unpredictable landlord – that stands between us and having a secure roof over our heads.

Let’s dig in, shall we?

The UK housing market is looking weaker than it has for a long time

Earlier this week, the Halifax house price index – one of the longest-running surveys – reported that prices had fallen by 3.1% in April. That was the largest monthly drop since 2010, and in fact, the second-largest drop on record (since 1983).

Now, that’s quite a headline-grabbing figure, but it’s not necessarily that reliable. These month-to-month readings can be spiky. But the annual figures also indicate a clear and ongoing slowdown. In the three months to March, prices rose by 2.7% year-on-year. In the three months to April, that slipped to 2.2%.

That means – as measured by Halifax at least – house prices are now falling in real (after-inflation) terms. Also note that prices have fallen quarter-on-quarter for each of the past three quarters. For now, at least, the slowdown is accelerating (if that makes sense).

Now, this morning, we have the latest survey from the Royal Institution for Chartered Surveyors (RICS). Every month, RICS asks its members to give their view on the temperature of the property market. And in April, they were the gloomiest they’ve been since late 2012.

At a national level, a narrow majority of surveyors reckon house prices are now falling. (RICS has a measuring scheme whereby a number above zero means a net balance of surveyors think prices are rising, and a number below zero thinks they are falling. The figure is currently sitting at -8, which is modestly negative). We haven’t seen that number in negative territory since November 2012 – and back then it was climbing out of a rut, rather than going into one.

However, most of the slowdown is in London and the south of England. Just as the post-2008 house-price recovery started in London and (very) gradually filtered out to the rest of the UK, so the slowdown appears to be doing likewise.

In London, the vast majority reported falling prices (the reading was -65, quite a deterioration on last month), while the reading in the southeast was also heavily negative. In the north of England and Scotland (and in Northern Ireland, whose housing market has taken a lot longer to recover than the rest of the UK), the market is still going up.

So of course, the question on everyone’s lips is – what’s next?

A house price crash still looks unlikely

We’ve looked at the reasons behind the UK housing market slowdown on several occasions in the past (this was the most recent). To sum up, commentators will often blame the political atmosphere (it’s Corbyn or it’s Brexit), or some other nebulous “feely” factor like the weather.

But people largely don’t buy or sell houses based on what might happen in the future. Instead, it’s the economics that affect them. And the point is that the economics are turning rapidly against property on many different levels.

Houses are, generally, too expensive, as compared with history, certainly in terms of what you need to borrow versus your income. Falling interest rates have maintained affordability, but left saving for a deposit as a huge problem. But that’s been the case for a very long time.

The biggest changes have been the removal of tax relief on mortgage interest for landlords; big hikes in stamp duty for the most expensive properties; and finally, the fact that interest rates are finally rising. Regardless of what Mark Carney and chums decide to do in the short term later today, the Bank of England interest rate is ticking higher, not lower.

So the UK housing market is being squeezed on all sides. Ironically, if prices fall, we’ll no doubt have the government claiming that it’s all to do with successful policies to get housebuilding up. In fact, it’ll be entirely to do with the price of credit and the death of the investment case for UK residential housing.

As I’ve pointed out in the past, the main barrier to a proper crash is that, ultimately, at the moment, most people can afford to stay put. So while transactions may be grinding to a halt – and those transactions that do take place will be fraught with haggling and lengthy chains – the odds of a 2008 or early 1990s-style plunge seem low.

Landlords are selling up – but rents aren’t rising

That said, given how much bigger the buy-to-let market has grown in the last two decades, I may be underestimating the effect of landlords selling up.

One point that landlords’ representatives kept making when the rules were being tightened was that they would just pass rising costs onto tenants, and that rents would go higher. Also, as landlords sold off, there would be fewer rental properties, which would also drive prices higher.

Well, on that front, here are a few choice quotes from London surveyors (listed at the back of the RICS report):

“Tenants are staying in the same properties longer. On renewal, landlords are not asking for higher rents.”

“Landlords are reducing rents to meet low levels of demand.”

“Market rents are still falling but now at a slower pace.”

A couple are more optimistic, but the overall tone is negative. At a national level, as RICS put it, “tenant demand in the three months to April was stagnant”, while the number of new properties for rent was also flat.

So hang on – the supply of rental properties is falling, but so are rents? How does that work? Well, the conclusion has to be – at least partly – that as landlords sell up, or stop competing with residential buyers to purchase new properties (down south, at least), then there’s more room for people who would have rented to buy a house instead.

It’s something to keep an eye on. But the squeeze on landlords is only getting harder. Mortgage interest-rate relief continues to taper for the next two years, while regulations around health and safety and the like are getting tougher.

The pendulum has swung decisively against the amateur landlord, and I don’t see that changing. As more of them get squeezed out by unexpectedly high tax bills, this looks like the weakest spot in an already fragile market.

Source: Money Week

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Investors tap alternative funds in buy-to-let struggle

Property investors are opting to raise alternative finance after struggling to secure buy-to-let mortgages, the latest property Investor Survey conducted by short-term finance lender, mtf, has found.

Some 57% of 84 property investors struggled to secure a buy-to-let mortgage in the past 12 months, with 62% citing affordability criteria as the primary barrier to mainstream funding. This was followed by age restrictions at 20% and insufficient deposit capital at 18%.

Yet 43% surveyed filled the funding gap with other sources of liquidity, as 40% of those opted for secured loans and 30% raised bridging finance.

Tomer Aboody, director of mtf said: “The results from our Q1 Property Investor Survey reflect the impact of stricter affordability and stress testing from lenders on professional property investors’ ability to obtain mainstream funding.

“However, specialist lenders are stepping in to meet the needs of borrowers and fill the liquidity gap.”

Some 57% thought a more flexible approach to lending was key for mainstream buy-to-let lenders improving. And 29% said a reduction of processing times would be the best improvement, while 14% felt offering better rates would help greatly.

Source: Mortgage Introducer

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Landlords sit on hands over market uncertainty

Nearly half of landlords have decided to sit on their hands while they wait and see how the buy-to-let market is affected by Brexit and regulatory changes.

Shawbrook Bank found 49 per cent of landlords said they were going to wait six to 12 months before they put any measures into place to prevent the impact of the regulatory changes.

The bank’s annual BTL Barometre found 22 per cent of landlords cited regulation changes as possible threats while 21 per cent mentioned interest rate movements and 16 per cent cited lending restrictions.

Karen Bennett, managing director of Shawbrook Bank Commercial Mortgages, said: “Stricter affordability tests for portfolio landlords and interest rate rises will make it harder for some to get funding and this month will also see the next phase of reductions in tax relief for buy-to-let, further hitting landlords’ profits.

“It is encouraging to see professional landlords adapting their strategy in line with regulatory change, thereby helping to ensure the long-term sustainability of the industry.

“We have seen a slight cooling as landlords evaluate their options, not rushing into purchases and holding existing property. It is important to recognise however, that buy-to-let remains a crucial component in the wider UK housing landscape, and data suggests that although investors may tread carefully throughout 2018, they retain confidence in the fundamentals of this market.”

When it comes to regulatory challenges, the change that has most affected landlords is the reduction on the tax relief for buy-to-let mortgages, with 52 per cent of landlords saying this had the biggest impact.

Landlords said the 3 per cent extra stamp duty levy was the second biggest regulatory change that has had an impact, with 21 per cent feeling the effect of this.

To counteract the changes, some landlords were looking for ways to protect their portfolios and the results found 33 per cent of landlords had already, or were planning to, set up a limited company while 18 per cent intend to re-mortgage and 19 per cent are looking to sell their properties.

Ray Boulger, senior mortgage technical manager at John Charcol, said: “Brexit uncertainly is really only a material factor at the top end of the London market.

“Mortgage lending figures demonstrate very clearly the impact of the various recent regulatory changes. In 2015 gross buy-to-let lending was 17.7 per cent of total mortgage lending but in 2017 had fallen sharply to only 12.8 per cent.

“A positive note for landlords is that the weaker demand for buy-to-let mortgages is incentivising lenders to improve criteria where they have identified there is scope to do so without compromising the quality of lending and strong lender competition is also reflected in the rates on offer.”

Source: FT Adviser

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Mortgage arrears fall to record low

Mortgage arrears hit record lows in the first quarter of this year, figures from mortgage trade body UK Finance have revealed.

The figures showed there were 7,800 homeowner mortgages in arrears of 2.5 per cent or more of the outstanding balance in the first quarter, 8 per cent fewer than in the same period of the previous year.

This is the lowest level since records began.

A total of 24,100 people had mortgages with more significant arrears, of 10 per cent or more of the outstanding balance, which is 3 per cent fewer than the previous year.

There were 4,500 buy-to-let mortgages in arrears of 2.5 per cent or more, and 1,100 of them had arrears of 10 per cent or more.

This represented a 6 per cent drop from the previous year.

Despite this fall, the number of homes that were repossessed remained the same, with 1,200 homeowner mortgage properties taken into possession.

Jackie Bennett, director of mortgages at UK Finance, said that while the figures were good, arrears and repossessions could increase due to the change to Support for Mortgage Interest (SMI), which has become a loan rather than a benefit.

Ms Bennett said: “Only a small minority of those eligible for the SMI loan have taken it up so far.

“Lenders will proactively help borrowers in receipt of Support for Mortgage Interest (SMI) to see if there are other ways to make up their payments if they do not want to take out the loan.

“As ever, customers should not hesitate to contact their lender if they anticipate any payment problems and want to discuss what options are available. Repossession is always a last resort.”

Jonathan Harris, director of mortgage broker Anderson Harris, warned that there was “no room for complacency” following the figures.

He said: “Borrowers need to be prepared. We suspect that when it comes to their finances there are many people who don’t have a buffer to tide them over should they get into difficulty.

“Borrowers must plan ahead and consider how they will cope if interest rates rise. Fixed rate mortgages are still great value and remain competitively priced. It is also vital that borrowers keep their lender in the loop if they are struggling to pay their mortgage.

“Lenders are being flexible and showing forbearance but it is much easier and less stressful to come up with solutions early on than further down the line when options may be much more limited.”

Jeremy Leaf, north London estate agent and a former Rics residential chairman, said: “These figures are interesting because they show a housing market which, although softening, is unlikely to collapse anytime soon, despite all the gloom and doom we have seen over the past few days in Halifax and Rics data.

“One of the precursors of a more significant correction in property prices is more forced sales and clearly we are not seeing, or likely to see, that at the moment, particularly while mortgage rates are so low, wages are actually creeping up ahead of inflation and employment numbers remain strong.”

Source: FT Adviser

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Investors Cautious About Mitigating Regulatory Changes

Buy to let investors are planning to proceed with caution before putting in any measures to mitigate the impact of regulatory changes, according to new research from Shawbrook Bank.

Shawbrook Bank found that 49 per cent of landlords plan to wait six to twelve months before putting measures in place to prevent the impact of regulatory changes.

The Bank’s annual buy to let Barometer found that 22 per cent of landlords saw regulatory changes as possible threats. 21 per cent found interest rate movements particularly worrying, and 16 per cent were largely concerned about lending restrictions.

The regulatory change that has most affected landlords so far has been the reduction of mortgage interest tax relief for buy to let mortgages. 52 per cent of landlords stated that this had had the largest impact.

According to the landlords surveyed the extra 3 per cent stamp duty was also a significant issue, with 21 per cent feeling affected by this.

Managing director of Shawbrook Bank Commercial Mortgages, Karen Bennett, said: ‘Stricter affordability tests for portfolio landlords and interest rate rises will make it harder for some to get funding and this month will also see the next phase of reductions in tax relief for buy to let, further hitting landlords’ profits. It is encouraging to see professional landlords adapting their strategy in line with regulatory change, thereby helping to ensure the long-term sustainability of the industry.’

He continued: ‘We have seen a slight cooling as landlords evaluate their options, not rushing into purchases and holding existing property. It is important to recognise however, that buy-to-let remains a crucial component in the wider UK housing landscape, and data suggests that although investors may tread carefully throughout 2018, they retain confidence in the fundamentals of this market.’

In order to mitigate the regulatory changes some landlords were looking for ways to protect their portfolios. 33 per cent of landlords had already, or were planning to, set up a limited company. 18 per cent were planning to re-mortgage and 19 per cent are looking to sell their properties.

Senior mortgage technical manager at John Charcol, Ray Boulger, added: ‘Brexit uncertainly is really only a material factor at the top end of the London market. Mortgage lending figures demonstrate very clearly the impact of the various recent regulatory changes. In 2015 gross buy to let lending was 17.7 per cent of total mortgage lending but in 2017 had fallen sharply to only 12.8 per cent. A positive note for landlords is that the weaker demand for buy-to-let mortgages is incentivising lenders to improve criteria where they have identified there is scope to do so without compromising the quality of lending and strong lender competition is also reflected in the rates on offer’

Source: Residential Landlord