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  • loanarranger
    replied
    Middle-class 'buy-to-let dream' is over - as mortgage lenders to demand 40pc deposits

    An article has been included in the Telegraph and whilst I do not subscribe completely to the doomsday scenario it does highlight the problems which lie ahead and what I have been cautioning about in recent weeks.

    Would welcome views on this article

    © Provided by The Telegraph Investing in buy-to-let property is on the verge of becoming unaffordable for middle-class savers as stricter lending rules mean they will soon need at least a 40pc deposit to qualify for a mortgage, Telegraph analysis reveals.

    New, tighter lending criteria set to be enforced as early as this autumn by the Bank of England will lock large groups of savers out Britain's rental market, and limit it to an elite club of wealthy investors only.

    Under the new system borrowers are likely to have to find nearly twice as much money for a down payment on a property than at present, as around half of buy-to-let mortgages sold today only require a 25pc deposit, according to figures from a leading broker.

    Until recently middle-class savers have helped fuel a buy-to-let boom in Britain with thousands funneling their life savings into buy-to-let to help fund their retirement.

    But now it appears buy-to-let may have had its heyday as The Bank is forcing lenders to "toughen up" over concerns they have relaxed standards for landlords, creating the conditions for a disastrous property crash.

    Most lenders' "stress tests", which tell if someone can afford a mortgage, currently assume borrowers pay interest at 5pc, and that their rental income will be 25pc higher than their mortgage.

    Based on these criteria and the figures for the average UK home worth £202,436, and tenants paying the average UK rent at £764 a month, the average the minimum deposit typically required to obtain a buy-to-let mortgage is £55,741 (27.5pc).

    But in March The Bank of England recommended that interest assumptions should rise to at least 5.5pc, and this will be confirmed later this year after a formal consultation.

    Some lenders are already getting stricter following the Bank's warnings, for example this week Nationwide, one of Britain's biggest lenders, requires borrowers to earn rental income which is 45pc higher than their mortgage, up from the usual 25pc.

    Other lenders will follow suit in a "domino effect", brokers said last week.

    Calculations done for the Telegraph by John Charcol, reveal to to qualify for one of Nationwide's new deals, a landlord buying the average UK home with a mortgage needs a £83,349 (41.2pc) deposit.

    This is based on an interest-only deal requiring a £75,728 (37.4pc) deposit, plus £7,621 (3.8pc) stamp duty.

    New buy-to-let rules coming in to action

    And if the change proposed by the Bank of England goes ahead, Nationwide would have to tighten its rules even further, as it would raise the interest rate it uses in its stress tests from 4.99pc to at least 5.5pc. This could increase the deposit required to obtain a mortgage by 5.8pc to £95,144, or 47pc of the purchase price.

    The calculations show the effect of the changes will be even more extreme in more expensive areas where rental yields tend to be lower, with London and the South East on track to move well out of reach for most amateur landlords.

    Based on an average London property on the market at £500,000 and tenants paying the average London rent of £1,540 a month, a landlord would need a £255,407 (54pc) deposit to qualify for a Nationwide mortgage. This is based on an interest only mortgage requiring a £244,593 deposit (48.9pc), plus £30,000 for stamp duty.

    The move is just the latest in a string of measures designed to cool the buy-to-let market, as changes introduced last month mean any buy-to-let property worth more than £40,000 now attracts an additional 3pc stamp duty charge. The Government is also reducing tax relief on buy-to-let mortgage interest payments from April 2017, a move which will hurt borrowers with big mortgages. Experts said it was also a major driver behind lenders becoming more cautious.

    Ray Boulger, senior technical manager at John Charcol, who conducted the analysis, said the move would be a "huge" blow to middle-class landlords looking to buy or remortgage in order to raise equity to expand their property portfolio. He said: "This will be gutting for people who can't afford to remortgage

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  • loanarranger
    replied
    Rental market predicted to be flooded

    Here is an article lifted from the BBC which if true in its predictions will amuse lenders to reassess their rental stress calculations as an act of safety.

    " Landlords who scrambled to buy homes earlier this year are beginning to rent them out, providing tenants with a flood of properties, research suggests.
    A record number of sales took place in March, as buyers tried to beat last month's Stamp Duty deadline.
    That has resulted in an 11.5% rise in rental properties being listed in April, according to data from the website Rightmove.
    Some towns, like Worcester, have seen rental listings surge by nearly 50% .
    Even in London, the number of homes for rent rose by 9.1% last month, says the research conducted by investment firm Property Partner.
    It looked at 90 towns and cities across the UK, and found that the supply of properties went up in 82% of them.
    Where rental properties are coming onto the market
    Town Region % increase in listings (April v March 2016)
    Worcester West Midlands 48.9%
    Chelmsford East 38%
    Stevenage South East 36.4%
    Southport North West 34.4%
    Telford West Midlands 32.3%
    Cheltenham South West 30.3%
    Watford East 29.4%
    Bath South West 29.3%
    Newport Wales 27%
    Woking South East 26.8%
    source: Property Partner
    However many landlords may take some time to renovate their newly-acquired houses, before offering them for rent.
    "Some landlords might want to do up their properties - such as getting the painters in, or installing a new kitchen - so there may be a delay," said Richard Donnell from the property website Hometrack.
    "However, over the next one or two months, a reasonable slug of these properties will come on the market."
    House price calculator House price calculator
    Use our calculator to see where you can afford to rent or buy
    Lower rents
    In theory, increased supply should mean a fall in the cost of renting.
    But according to the Reed Rains buy-to-let index, rents have been falling in any case since September 2015.
    At that time, rents in England and Wales hit an average of £816 a month. By April 2016 they had fallen to £791 a month.
    But Adrian Gill, a director of Reed Rains and Your Move, believes they will not fall much further.
    "Tenants still need homes and demand is still soaring," he told the BBC.
    "So actually later this year the balance of supply and demand might shift even further in favour of landlords. A short-term spurt of supply won't shift the fundamentals."
    Dan Gandesha, the chief executive of Property Partner, said the supply of rental properties was unlikely to continue rising.

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  • loanarranger
    replied
    Regrettably it isn't that simple, under the requirements of the Basel 3 rules , such loans require greater capital sums to protect the basic funding and for some lenders this might not be possible and the only way that they might continue to fund such lending is as I have previously mentioned is the restrict the percentage LtV plus charge a higher premium for such lending.

    I had the opportunity of meeting a senior executive of a Buy to Let lender who mentioned that they along with another significantly well established lender in this niche sector were seeking a more realistic approach to the question of rental stress calculations taking account of the tax changes which will kick in over the next 4 years taking full account of the actual tax position of applicants both now and by the time the full changes take effect in order not to disadvantage borrowers who will remain to any significant level as standard tax payers. This as a broker comes as a refreshing approach to lending in the BtL sector for individuals who do not want to go to the expense of going down the corporate route particularly as some have , for understandable reasons elected to make the rental calculations assessment that much stricter.
    It is evident that all lenders are in a state of flux following the recent changes and new mortgage applications have shrunk considerably but I believe that there will be a light at the end of the tunnel albeit the days of cheap and easily available BtL funding will become a thing of the past by September.
    I will of course post any updates on the forum.

    Leave a comment:


  • Logical.Lean
    replied
    I assume that now very few BTL's will be bought by individuals and the few mortgage providers who are prepared to lend to Ltd companies (Whether SPVs or Trading companies) will be joined by all the other lenders who suddenly see demand of "traditional BTL mortgages" fall off to next to zero.

    Leave a comment:


  • loanarranger
    replied
    CML: stamp duty rise triggers 60,000 extra transactions

    The CML says that the distortion caused by the new stamp duty rate "appears to have been larger than anything we've seen before that's associated with a tax change".

    Its analysis of new Bank of England and HM Revenue and Customs data shows that on a non-seasonally adjusted basis, property transactions reached 162,000 in March.

    The CML would normally have expected this figure to have been just over 100,000, which implies a large chunk of the increase in transactions was down to the stamp duty change.

    A 60,000 increase in property transactions compared to the baseline was "larger than expected", which the CML has attributed largely to a marked increase in cash transactions.

    Cash-funded transactions increased by nearly as much as mortgage transactions, even though cash has on average only accounted for 35% of the market.

    The CML's current best estimate is that an extra 32,000 mortgaged transactions took place in March, which means that cash transactions rose by 28,000.

    Of the four categories, the largest proportionate increase was in buy-to-let house purchases, which increased by more than 180% from February. The next biggest increase was in cash transactions, which rose by more than 80%. Transactions by movers increased 60% and first-time buyer purchases increased by 28% compared to February.

    Therefore buy-to-let still only made up only a third of the 60,000 increase in total property transactions.

    CML analyst Mohammad Jamei said:

    "Alongside the growth in transactions, there was a corresponding jump in lending. Our initial estimate was of extra lending of between £4 and £5 billion, with the data from the Bank of England showing the actual figure was at the higher end of this figure.

    "We’ve now revised our initial estimate of lending in March to £26.2 billion, which was 46% higher than February. This implies just over £5 billion extra lending than would otherwise have been the case, which roughly tallies with the 32,000 or so extra mortgaged transactions, given an average loan of about £150,000 per mortgaged transaction.

    "Our understanding is that approved applications that were in the pipeline were squeezed to complete before the stamp duty deadline, as opposed to seeing a big increase in new applications being approved in March. As a result, it is very likely that we will see lower activity levels in the next few months, which ties in with early data we have collected for April, showing a marked drop-off in lending."

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  • PJackson
    replied
    Did you mean the EEA?

    https://en.wikipedia.org/wiki/European_Economic_Area

    Leave a comment:


  • loanarranger
    replied
    Wow and there I was thinking that they were just a bunch of interfering beurocrats. Thanks for the clarification.

    Leave a comment:


  • andybenw
    replied
    I know Wikipecia isn't always correct. Still..

    "The European Economic Community (EEC) was a regional organisation which aimed to bring about economic integration among its member states. It was created by the Treaty of Rome of 1957.[1] Upon the formation of the European Union (EU) in 1993, the EEC was incorporated and renamed as the European Community (EC). In 2009 the EC's institutions were absorbed into the EU's wider framework and the community ceased to exist."

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  • loanarranger
    replied
    No the Basel 3 like its previous versions is applicable to all lending institutions within the European Economic Community.

    Given that Home Ownership is far stronger in the UK than anywhere else in the community and that BtL is not technically currently regarded as full commercial lending unlike in the EEC where anything outside of home ownership is classified as commercial the Basel 3 sets up the framework of tiers of capital reserves against the different form of lending , therefore for relatively low loan to values carry the bottom tier of capital adequacy and easy to cover with the capital structures of banks and building societies but this becomes more challenging as the loan to value increases and the perceived higher risk of default attached.

    It is for this reason why the UK banks and building societies are more affected than their counterparts in Europe and why there is now a 2 pronged attack by the Basel 3 rules and the expectations driven by the BoE for lenders to adopt a more prudent approach to lending not only for residential homeowner loans but the elephant in the room in the guise of Buy to Let.

    Apologies for the extended response but there needs to be an understanding that irrespective of the requirements of the BoE , the EEC is implementing a range of rules to ensure that there is no repeat of any bank falling due to making loans too readily available.

    Leave a comment:


  • andybenw
    replied
    Loanarranger, when you refer to the EEC is this in ironic fashion?

    Leave a comment:


  • loanarranger
    replied
    I bet you needed a large scotch to get over the shock; clearly you are a man of substance to be feted by your bank.

    Leave a comment:


  • hech123
    replied
    Yes I am with Lloyds on a commercial basis but this person did not know that. I just found it interesting they were approaching me as this had never happened before

    Leave a comment:


  • loanarranger
    replied
    Hi Hech123

    I suspect that the Lloyds group are experiencing like a number of lenders a marked reduction in the flow of new business following the lead up to and post April 1st. Their profile has been markedly towards the small investor and indeed most run of the mill brokers gravitate to either BM or TMW for the first two or three mortgages given the relative simplicity of their underwriting. I suspect that novice landlords are taking a rain check to see what develops over the short term thereby contributing to the reduction in new business. Therefore I can see no other reason why Lloyds and its associated entities are being proactive unfortunately for experienced landlords like yourself I assume that the limit of 3 BtL properties has either been reached or indeed exceeded if borrowings were effected pre credit crunch.

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  • hech123
    replied
    Interestingly Lloyds bank are actually starting to now push BTL mortgages, I was approached by them when I popped in to the bank. this is a new approach as they did not really push this previously. I said as much to the manager and she told me they have been told to try and push them. Not sure what your thoughts are loanarranger? Have you noticed Lloyds?

    Leave a comment:


  • loanarranger
    replied
    New BTL underwriting rules to cause surge in activity


    By Rozi Jones 28 Apr 2016
    MORTGAGES
    New BTL underwriting rules to cause surge in activity
    Fleet Mortgages believes the introduction of new underwriting rules for buy-to-let lenders by the PRA could spark a "significant increase in market activity" as landlords seek to secure finance pre-intervention.

    The new rules are expected to mean lenders have to impose stricter affordability measures on applicants resulting in a reduction in the amount buy-to-let landlords can borrow.

    Fleet Mortgages anticipates the new rules could be introduced as early as January 2017, and landlords and their mortgage advisers may well treat the intervening period as they did the months prior to the introduction of the stamp duty changes on the 31st March.

    Fleet also believes mortgage advisers will be briefing their landlord clients throughout the course of the year of the likelihood of stricter underwriting criteria impacting on the loan amounts achievable.

    Fleet Mortgages believes ‘portfolio landlords’ – defined as those who own four or more properties – may be the group most affected by the intervention because of the PRA’s proposed rule that lenders must adopt a specialist affordability assessment for them. It believes this could precipitate a growing number of portfolio landlords to secure their mortgage finance in 2016 rather than waiting until 2017.

    Bob Young, Chief Executive Officer of Fleet Mortgages, commented:

    “Many have suggested that the recent stamp duty deadline is the only one facing the buy-to-let sector and market activity will now wither on the vine as landlords take stock of their positions for the foreseeable future.

    “The recent PRA consultation on buy-to-let underwriting actually makes it more likely that we will see activity levels begin to increase again over the course of the year as we get closer to the implementation of the rules. Certainly, given their intention to drive down the amounts buy-to-let landlords can borrow, it would be logical to think existing landlords seeking to remortgage or capital raise or both, will make the most of the current market conditions which will allow them to borrow at higher levels.


    “Once the new rules kick-in, landlords and their advisers may well find their ability to secure the money they want has been compromised by the stricter underwriting criteria imposed on lenders, plus of course the likelihood that increased capital requirements will also impact on lender’s ability to offer the same levels of funding. It all adds up to the potential for renewed vigour in the buy-to-let sector, especially for those who may be deemed portfolio landlords, given the special affordability requirements they will face next year.

    “Our advice to advisers is to make sure any clients with these circumstances are contacted and they are made aware of how the lending landscape might change in 2017. Those in a position to make their new mortgage arrangements now are likely to find a much more hospitable lending environment, rather than waiting for lenders to implement these new rules and ultimately for them to end up disappointed.”

    Leave a comment:

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