Currently the BTL mortgage arena is being squeezed. The rental cover, which is the amount the rent must exceed the mortgage payments has increased from 125% to 145%. This in effect reduces the amount one can borrow on a BTL property. The Mortgage Works the BTL arm of Nationwide, started the ball rolling with this increase.
This is laying the framework for when the new government proposal starts to kick in April 2017.
This will mean one can no longer offset their mortgage interest cost from their rental income. The maximum allowable will be at the basic rate.
Therefore, if you’re a basic rate tax payer this will have no effect. It will really start to pinch you if you’re a high rate payer. It doesn’t take much to be a high rate payer, the current threshold is £43,001. If you’re living and renting in London on this salary, after paying your dues you would just be able just to breath and stay afloat.
Many papers who have reported the news of the increase mentioned:
“In low-yield areas like London, landlords with less than 40pc deposits would struggle to borrow in future.
"In London where yields are down to 2 or 3pc you’re only going to be able to get a 60pc mortgage from now on. Landlords are going to have to put more cash in.
"It's likely that these costs will be passed onto tenants, so the cost of renting will go up, too."
The reality is a lot worse. This quote was by a broker, however I cannot see the reasoning behind this statement.
In central London the yields are very low as it is, typically 1-2%. To give you an idea we have two properties which we are looking to rent. One which is valued at £1.75m which is currently on the market at £895pw giving a rental yield of 2.6% assuming we achieve the full rental figure. This is a two bedroom property in W1.
The second property is in Chesterfield House, Mayfair which is on the market for £1,250pw of a valuation of £3.5m giving a yield of 1.8%.
Due to the low rental on these properties, assuming a 5% interest rate and a rental cover of 25% the amount allowed to be borrowed on this property will be just over a million. With the rental cover increasing the amount allowed to be borrowed will be about £900k, this is a LTV of 25% down from 33%.
This means now 75% in cash is required to purchase this property today. In regards to the two bedroom property the cash required will be 63%.
I doubt the increase in cost will be passed on to tenants, it will result in the landlords absorbing the loss. Let’s face the facts, property has been a big income earner for landlords in recent years, this move will mean less in their pockets. This move will result in less liquidity in the market place.
The LTV of these mortgage products is now irrelevant as the amount that one is able to borrow will be driven by the amount of rental the property can generate and not its value.
I foresee the market reacting in the following ways:
The ripple effect will ripple in wider circles, meaning investors will start to scout areas outside of London, in the pursuit of higher yields.
There will be a renewed interest in HMO properties, this is the method to increase yields whilst enjoying the benefits of owning a property in a strong Location.
There will be a renewed increase in online crowd funding platforms, this dispenses with the need of obtaining mortgages and is likely to shield one from the tax changes which are due to come in from next year.
I have also heard a whisper of a new and innovative product in the market, it works in the following way: the amount of shortfall of rental from the mortgage, given the rental cover, will be deducted from the amount lent over the period of the product. This seems sensible and allows the investor to borrow close to the 75% LTV mark. The issue here is given the limited providers of this type of product what happens when the times comes for remortgage? You will be limited to the provider you’re with, and maybe a couple of other providers.
Given the BTL market in London is heavily reliant on credit, any shift in policy will have an impact on the way the market operates. This is less true as you go into the centre.
Here the ‘world’ operates under different laws. Property here hasn’t made sense from an ordinary BTL perspective for decades. This is due for several reasons, firstly many are owned in cash, secondly they have been bought through off shore structures, and thirdly they have financing from private banks which have a different lending policy than your average high street lender.
The current environment is in stark contrast to the good old pre credit crunch days. Back in 2002 I was offered 10 flats in West End Key, Paddington. The properties were new build and came with two year tenancies. The valuations were £350k each and the purchase price was £275k each. This was the time when you could get an 85% mortgage based on the valuation and not the purchase price. In short I could have bought all ten for free having enough money left over to cover the sourcing fees and the stamp duty.
At the time these were the most expensive one bedroom properties to ever come on the market. I was unable to foresee where the prices would go.
Currently these properties are worth around £650k each, a profit of £3m, and that’s not the best part. The best part is the return on funds deployed is infinity, as no money had been put into the deal. Hindsight is a wonderful thing.
The London property market is going through some interesting changes, there are restrictions but opportunities are also being created. One thing is for sure the property market will not disappear, it will evolve and adapt in response to the changes imposed.
Any time new rules come into play there will also be legitimate and innovative ways to respond. Call the office to find out more.
