Surge in Buy-to-Let Lending

To LetFigures recently show a significant surge in buy-to-let lending in the late stages of 2015. Mortgages granted to buyers of residential investment properties in November were up by more than a third compared to the same time in 2014.

Buy-to-let lending in November was down 6% on the previous month, but still up by 35% on November of the previous year, compared to 9.3% for the mortgage market as a whole. In total, 23,300 loans were granted to fund buy-to-let investment. This may come as a surprise to many, given the number of tax reforms announced last summer that will constitute a crackdown on the buy-to-let sector over the next few years.

In the July budget, George Osborne announced a number of measures and changes affecting the way second homes and property investments are taxed. These were designed to tackle what the government perceives as a property market that favours landlords over owner-occupiers. The changes, due to be rolled out in stages and should be fully in force by 2020, will severely impact the profitability of buy-to-let for many investors, primarily those who are higher rate taxpayers, and could leave some with unprofitable or even loss-making properties. Naturally, this led to predictions that existing landlords may cease buying additional properties, and that both established investors and would-be new landlords will be put off of making further investment purchases.

The fact that the number of buy-to-let loans advanced in November showed such a significant year-on-year increase seems at first to run contrary to such predictions. However, the rise in activity may be partially a result of the changes. A separate, more recent measure announced is an imminent increase in stamp duty on second home purchases. Investors who fall outside the scope of the other reforms or who have a strategy to weather them may be rushing to get purchases completed before this takes effect.

Perhaps more significantly, it is reported that the larger part of buy-to-let lending activity is made up of landlords remortgaging properties they already hold. This could be a direct response to one of the biggest and most impactful of the impending reforms. For many landlords, the most costly tax change due to be rolled out is the loss of mortgage interest relief. In order to reduce the impact of such a change, many landlords are looking to take out new mortgages, taking advantage of continued low rates and locking themselves into such a rate for a longer period in order to keep their mortgage as manageable as possible.

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Renting Out a Property? The Financial Considerations

Although buy-to-let isn’t quite the “hot property” it was prior to the recent economic recession, there is still much interest in it. Indeed, with ever still property price rises combined with low interest rates on standard savings in the bank, many who have money to invest still see investment in property as the only way to go.

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The foremost calculation in determining the profitability of a rental investment is calculating its rental yield – the amount of money that is received in rent in relation to the amount of money paid for the property. There are however, many considerations that potential and existing landlords fail to undertake which leaves them a much less clearer picture of the exact profitability of such investment. Here are some to consider:

Insurance:

Landlords must ensure that the property is insured correctly. The exact insured required (whether buildings, contents or both) depends on the property and its tenancy terms. This insurance can cost a few hundred pounds.

Legal Compliance:

Some legal requirements for landlords are one-off for each tenancy – such as the Tenancy Deposit Scheme. Some of the deposit schemes are free of charge for protecting the tenant’s security deposit, though many charge the landlord. Other legal requirements are ongoing, and require yearly spends on the part of the landlord, e.g. the annual Gas Safety Certificate. This must be carried out by qualified gas safe engineers and often costs around the £100 mark each time.

Property Repair and Maintenance:

There is a legal obligation under the Landlord and Tenant Act 1985 for landlords to maintain properties to a certain standard. This includes ensuring heating and boiler installations are working properly, as well the washing facilities in the property. Damage done by the tenant is not in the remit though any general repairs to the property are required and the landlord foots the bill.

Agency fees:

For those landlords who choose not to rent out and manage the property themselves, there is also the cost of using a letting agent’s services. They often charge a percentage of your annual rental income to let the property or to also manage the property and tenancy on a long-term basis too – though this is a good option to take if you can’t or don’t want to deal with managing the property yourself.

Do be careful of some agents who can charge large mark ups on contractor costs when it comes to repair or maintenance work. Also, for tenants it is very off-putting being charged re-let fees by an agent at the end of a tenancy period if they choose to continue their tenancy. Be very selective when choosing who to let your property with – research will pay off.

Empty periods:

It is best to try to keep tenants happy as high turnover rates mean properties can be left empty and therefore a loss of rental income for the landlord. Any empty periods will need to be factored into costings.

Taxes due:

Landlords must declare the income they make to HMRC, and like all types of income it is subject to tax. Certain deductions can be made from the annual income received in rent.

 

These were some of the additional financial details that should be considered when investing in property for the rental market.

One very large consideration financially however, which has not been looked at yet, is the long-term consideration – capital growth on the value of the property. We all know the price of property has been going up over the years, and this trend, although slowing, is set to continue for the foreseeable future.

Growth is not the same in every part of the country and varies region to region and area to area, and this growth, long-term, is key to property investment being so in demand. Researching and choosing an area carefully will pay off in the long-run. Castle Estates (South London), have noted, for example, that although an area like Wandsworth now has a lower rental yield of around 5% compared to the 7-8% it was 5 years prior (steeply rising property prices do affect the rental yield calculation), the planned development around the Ram Brewery area of Wandsworth Center which includes improved transport links mean that not only is there likely to be long-term tenant demand, but also continued capital gain on property value for that area.

Research and knowledge will ensure better informed choices, though it cannot be denied that for all the costs, property generally is still a lucrative business for landlords, and will probably continue to be so.

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Slowdown Hits UK Housing Market

Recent months have been a period of slowdown for the UK housing market, and this has been further illustrated by the latest mortgage lending figures. According to newly-released data from the Band of England, August saw the number of mortgage approvals drop by almost 1900.

Altogether, August saw 64,212 mortgage approvals for the purchase of a residential house. This was down from July’s figure of 66,100, which itself represented a drop compared to the 66,923 approvals seen in the month of June.

These  figures back up the belief that many experts already had that the UK housing market is not going to keep up the pace it has recently displayed. According to HIS Global Insight’s chief UK and European economist, Howard Archer, “With housing market activity moderating from its early 2014 highs, we believe house prices are likely to generally rise at a more restrained rate over the coming months.”

This news comes soon after the revelation that this month has seen growth in house prices come to a stop. For the first time in a year and a half, according to Hometrack, house prices did not rise in September. Hometrack’s survey also identified the fact that more and more potential buyers are expressing concerns about the potential of a price bubble, as well as the fact that an increase in interest rates could be on the horizon.

The release of the Bank of England’s figures is also timely in coming shortly before new mortgage lending restrictions are due to take effect. Designed to cool off lending in the mortgage market, banks and building societies will be limited in their ability to lend to people who borrow more than 4.5 times their annual income.  Institutions will now be able to provide no more than 15% of new mortgages to customers within this group.

On the general sentiment among borrowers at present, Archer said: “While markedly improved consumer confidence – currently at the highest level for more than nine years – means people have become more prepared to borrow in recent months, they still appear wary of taking on a large amount of new debt.”

Mark Harris from SPF Private Clients, a mortgage broker, took a comparatively optimistic view. Harris pointed out that according to the figures, the remortgage market is in comparatively good health. This is largely thanks to homeowners switching onto better deals as lenders cut fixed rates.  However, Harris also warned about the possibility of interest rate rises in the near future. “While the governor of the Bank of England pledged that increases would be limited and gradual,” Harris said, “borrowers must still plan ahead and ensure they can afford their mortgage now and in the future.”

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Housing Benefits Cut to Devastate Nearly 1 Million Customers

The government is continuing with welfare reform cuts, which are creating a number of problems for many citizens. According to the Chartered Institute of Housing, many cuts are expected to force a number of families to decide between paying their rent or eating. About 800,000 families are going to have to make that decision within the next few months.

According to the ACIH, there will actually be many more families living off of benefits than there will be houses that they can afford with the state benefits. Unfortunately, they are going to have even more trouble in the coming months. As a result, many of the people living in these areas are going to be forced to move to more affordable areas. This doesn’t leave many options for them except the impoverished areas near the coast and northern England.

Beginning in January, the government has decided not to pay more than £250 a week for families living in two-bedroom homes. That act of reform would be painful for many families in and of itself. However, the government has gone beyond simply capping the weekly housing allowance. They have also decided to force families to live in housing with the cheapest third of rent in any borough that they live in.

This significantly reduces the options many families have and forces them to live in places that may not be appropriate for their family size. More concerning is that this may make it impossible for some families to find housing. There may not be enough housing options in many areas for these families to find anywhere to live at all.

Even if they relocate, many families will be unable to find housing. For example, if they moved to one community, they would find that there were already 17,000 people applying for housing in 10,000 units. They may need to be on a waiting list for a couple of years like many families in the United States.

There were slightly more low income houses than benefits claimants before this year. However, many families are seriously concerned about their futures as they try to find places to live in the coming year.

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House Prices Continue to Drop

House prices have dropped 1.4% from March to April 2011, to 160,395 according to the Halifax index’s record. The said drop was due to the lack of confidence among homebuyers continued to weigh heavily on the property market.

Cash-rich buyers who’re outside of in-demand areas are taking full advantage of low mortgage rates thus, the market remains stuck in the doldrums.

Lack of forced sellers due to many existing homeowners who are enjoying low mortgage rates are putting a prop under the market.

According to Halifax even with the gloomy economic mood and austerity, measures start to take effect. Prices were seeing a “modest decline”, a tad slower when the housing slump hit rock bottom during the aftermath of the credit crunch.

On a three-monthly basis, it is viewed as a more secure measure than the volatile monthly figures which on April, prices were down 1-4%.

According to Martin Ellis, Halifax housing economist “ Weak confidence among households, partly due to uncertainty over the economic outlook is constraining housing demand and resulting in some downward movement in prices.”

A relatively low burden for servicing mortgage debt and increased figure in employment are the likely to be providing support for the house prices, curbing the pace of decline are the signs of a modest tightening in housing market conditions.

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