Buy-to-let news to Friday 8th September 2017

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Huge leap in Manchester rental prices, up 7.53%

Manchester’s growing economic influence is creating a city of opportunity for buy-to-let investors, according to new research.

In the past 12 months, Manchester rental prices have increased by 7.53%, the fastest rental growth in the UK, according to LendInvest.

The city has also come out on top for rental yields in the UK, with average returns of 6.11%.
Manchester’s economic growth continues to develop with investment in infrastructure and culture contributing to creating a city where people want to live and work.

Manchester’s population is expected to rise from 520,000 to 600,000 in the next thirteen years.

With demand for housing and cheaper rental than the traditionally more expensive south, Manchester is experiencing the second fastest price growth in the country, property values having increased 7.1% in the last year, according to Hometrack.

Even so, house prices cost much less than in London, at an average of £157,500, compared to the capital’s £494,200, creating lots of opportunity for buy-to-let investors, at much less than half the cost of the capital.

Andrew Turner, chief executive at Commercial Trust, commented:

London has long held an allure for buy-to-let investors, as a hub of industry, a place of work and a centre of culture. People have constantly flocked to the capital and this migration has created opportunity for landlords.

“We are seeing something similar happening in Manchester now, with rising house prices and rentals, but a steady stream of tenants, looking to move to the city.

“The last 18 months has put financial pressure on many buy-to-let landlords, with affordability to buy further property put firmly into focus by the loss of mortgage interest tax relief and the introduction of the 3% stamp duty surcharge.

“These changes are perhaps more keenly felt in London, so it is natural that the Manchester market, which offers growing rental yields and houses at less than half the cost of London, is attracting plenty of buy-to-let interest.

Brokers well-placed to help landlords through new PRA minefield

The important role of specialist brokers has been highlighted as buy-to-let investors struggle to come to terms with new Prudential Regulation Authority (PRA) rules, which must be implemented by the end of this month.

Louisa Sedgwick, director of sales at Vida Homeloans, asserted that brokers were best-placed to help clients facing further complexity and stricter underwriting rules after September.

The PRA is changing the portfolio landlord rules. From 30 September, there will be a lot more complexity.

"If the customer has three properties or is likely to be buying into their fourth buy-to-let property, this is when the new rules kick in.

"For brokers, there will be more complexity; they will have to know their customers a lot more than they perhaps do now and there will be more forms to fill in.

Since January 1st, buy-to-let lenders regulated by the PRA have had to implement new underwriting criteria, which aims to ensure that buy-to-let lending remains affordable for the borrower, should there be a change in interest rates.

The result for borrowers has been a restriction on upper loan limits that were historically achievable.

The new PRA rules, which are applicable from September 30th, will see lenders implement new underwriting procedures for landlords with four or more buy-to-let properties. These cases, due to their financial complexity, have been deemed by the PRA to require additional care and attention before finance is extended.

Andrew Turner, chief executive at Commercial Trust, commented:

For many multi-property landlords, the new PRA rules will prove complex and time-consuming.

“Lending criteria is likely to get tougher and the amount of evidence required to complete an application is likely to increase.

“Each individual investor’s set of circumstances is different and the implications of the new rules will vary. In this environment the best thing any investor with any doubts can do is to seek help from a specialist broker, to find out what is most suitable for them.

New lending rules could cause surge in buy-to-let rental stock

The introduction of new PRA rules at the end of September could trigger a spate of rental sales, as landlords look to offload some of their properties.

The changes to buy-to-let lending criteria being introduced at the end of this month will tighten lending criteria further, after the industry underwent the introduction of more stringent 'stress tests' earlier this year.

The new rules will see landlords with more than 3 rental properties have their whole property portfolio assessed when they apply for additional buy-to-let funding in the future.

According to Mark Lawrinson, regional director of London agency Portico, the new criteria could compromise applications:

If you have six properties and four are generating enough rental income to cover mortgage payments and then some, but the other two are not, your new mortgage application may not be approved by some lenders.

Consequently, he suggests that a number of landlords could look to offload their poorer performing properties that are generating the lowest returns.

The new rules could also have a knock-on effect on rental prices, as landlords look to cover any shortfalls or carry out works to a property to both increase the capital value and the rent, in turn improving the yield and the return.”

Lawrinson concluded: “Rental yields in London are extremely low, so tougher affordability checks mean that a lot of properties simply won’t cut it as viable buy-to-let investments.

Capricorn Financial has suggested that the new rules may result in some lenders withdrawing completely from the buy-to-let lending sector.

Santander have already indicated they will not lend to portfolio landlords for purchases or additional borrowing, while others have improved their offering through brokers - NatWest, for example, have gone from a maximum of four properties to 10.

Andrew Turner, chief executive at Commercial Trust, commented:

The PRA changes that come into effect from September 30th will have a profound effect on many buy-to-let landlords and lenders.

“The important thing for landlords is to be fully prepared for more stringent lending criteria which scrutinises all of their owned properties.

“Rental yields are set to have an even more influential role in determining whether a buy-to-let application is successful, so there are potentially two scenarios that may unfold: one in which landlords simply look to sell properties yielding less profit; and the other which sees rental rises to help improve yields.

“The situation in London could see an increase in sales of rental properties, but that is assuming buy-to-let landlords own rental properties that fail to meet rental income criteria.

“My message is be prepared for scrutiny and if you have any concerns speak to a specialist broker, who can often help to clarify whether you have sufficient rental income before placing you with a lender.

31% of tenants fear never owning a home

The issue of affordability appears to be a barrier for many renters, with 31% fearing they will never be able to afford to buy their own home, new data reveals.

Both property prices and rent prices continue to rise around the country, resulting in the cost of a house increasing, while it is harder for tenants to save for a deposit – an issue considered as the biggest issue preventing renters from taking a first step on the housing ladder.

The research, carried out by Bilendi on behalf of GoCompare Mortgages, involved 2,000 individuals that are renting homes in the UK.

21% of tenants also believe that the loss of mortgage interest tax relief for buy-to-let landlords, which is being phased out by 2020, will result in fewer buy-to-let properties being available to rent.

With other tax changes, including the 3% stamp duty surcharge and the loss of the ‘wear and tear’ allowance affecting buy-to-let landlords, 6% of tenants indicated that they have already, or expect, to receive a rental increase as landlords pass on their added costs to their tenants.

Matt Sanders from GoCompare Mortgages said:

Our research reveals that half of all tenants are in rental accommodation because they can't afford to buy their own home.

“It now looks like many have given up all hope of ever owning a home and, for some, the changes to buy-to-let regulations are likely to make renting more expensive. In turn, that makes saving for a mortgage even harder.

A separate survey of 2,000 people, conducted by Kuflink, indicates that 38% of full-time employees are now living in rented accommodation.

Despite record average UK salary levels, 49% of 18- to 34-year olds want to buy a house in the next five years, but 46% do not believe they can afford to. That figure falls to 39% of 18- to 54-year olds who say that they will not be able to afford to buy a property by 2022.

Andrew Turner, chief executive at Commercial Trust commented:

The findings of this survey echo my expectation.

“As soon as the government plans for the stamp duty surcharge and the mortgage interest tax relief withdrawal were outlined, it was clear to most people within our industry that – contrary to their objective to help tenants - the government had simply added to their rent bill.

“The only way the government could have made these steps benefit those trying to get onto the property ladder, would have been to ensure the additional stock of homes were available, such that house prices matched affordability.

“Of course, successive governments have failed to build homes that the country needs and wages in the UK have not grown enough to make housing affordable.

“Regardless of any of this, what seems to have been overlooked is the immense value private rental property offers the UK housing market.

“A significant number of people favour the flexibility of renting, and even those that wish to buy can’t immediately do it and need decent homes to live in. Some members of parliament have voiced support for landlords, but we are yet to see any substantive changes as a result.

“With £2 billion of income from the stamp duty surcharge alone I don’t expect a change, but I feel this is a mistake on the government’s part. However, landlords are canny business people and more than capable at adapting to move forward and flourish.

Weaker pound attracts expats to buy-to-let market

British expats are increasingly being drawn to the UK buy-to-let market as the falling pound makes the UK a cheaper environment in which to buy property.

The last 12 months has seen the pound fall nearly 15% against the euro with the result that overseas buy-to-let investors have been increasingly tempted to invest in the UK property market as they get more for their money.

Skipton International has reported a “substantial” increase in enquiries for expat mortgages over the past year, with over double the number of expat enquiries to the end of May, than for the same period in 2016.

Data from Skipton International showed a 124% rise in enquiries from British expats in the United Arab Emirates, a 145% increase from British expats in Switzerland, and a 175% increase from British expats in Hong Kong.

Nigel Pascoe, director of lending at Skipton International, stated:

We are delighted to have been able to help so many British expats secure UK properties and achieve their investment aims. Capital growth in UK property has been strong over the past few years and buy-to-let remains a very popular long-term investment for British expats.

Andrew Turner, chief executive at Commercial Trust, commented:

The rise in interest from expats is a boost for the buy-to-let market.

“There are plenty of people ready to invest in British bricks and mortar, who have been waiting for the right opportunity. Whilst house prices have increased, the depreciation of the pound has made the market cheaper for many people living overseas.

“Buy-to-let business in the UK remains an attractive proposition for many and with rental demand at a high; there are good opportunities to make a return, a point which has been embellished by the fall of the pound against other currencies.

“However, whilst the buy-to-let market for expats is vibrant, it is also somewhat complicated. It can be difficult to secure a buy-to-let mortgage as an expat, because the potential risk involved for the lender is considered higher than with other products and consequently, the criteria for eligibility is more tightly controlled and can be more complicated.

“At Commercial Trust we are specialists in the expat market, we work directly with specialist lenders who finance these mortgages and we understand their lender criteria and interest rates. We can therefore help Britons living overseas to identify what criteria they will need to meet and also the most suitable product for their investment.

“Speaking to a dedicated buy-to-let broker such as ourselves gives you a much stronger chance of success because we know where to look to find specialist expat products.

Lettings fee ban a surprise to 31% of landlords

The proposed letting agent fee ban could have major consequences for buy-to-let landlords, yet 31% are unaware of the proposals revealed in last year’s Autumn Statement.

The proposals, which were reinforced at Westminster Hall on Wednesday, are aimed at ensuring tenants in England will no longer be subjected to paying letting fees. They will simply have to pay rent and a refundable deposit, which in theory, should make moving home more affordable.

However, other changes will fall upon landlords, adding further financial and possibly time costs.

New research from No Agent, indicated that 31% of landlords surveyed were completely unaware of the bill, with a further 14% admitting to being only somewhat aware.

The data also shows that almost half of those saying they were unaware of the ban are located in London, where the impact of the 3% stamp duty surcharge has been keenly felt, already resulting in rental increases.

The fear is that over half of the landlords surveyed feel that the ban in letting fees will see letting agents passing fees on to them, with the result that in turn, landlords will need to raise rents further in order to avoid losses.

Housing Minister Alok Sharma, however, cited the example of Scotland’s recent fee ban as evidence that a similar change will not result in dire consequences.

Additionally, the survey indicated that 35% of landlords agree with the Government’s stance that the ban will deliver impetus for agents to deliver better service levels for landlords.

Wednesday’s consultation back-tracked on the earlier proposal of a deposit cap of one month’s rent. The survey had suggested that 46% of landlords had indicated they would be less likely to rent homes to tenants with poor credit history, children or pets, with a smaller deposit.

It is time to bring the rental sector into the current day and remove the inefficiencies it has been plagued with for so many years, and this bill marks the beginning of this change,” said Calum Brannan, chief executive officer of No Agent.

“It’s worrying to see the awareness of the proposed tenant fee ban amongst landlords is so low, particularly given how much of an impact this will have on their current business models. More needs to be done by the Government to ensure this vital group know what is to come into effect in 2018.

Andrew Turner, chief executive at Commercial Trust, commented:

The proposed changes are likely to have a big effect on buy-to-let landlord finances when looking for new tenants.

“It is a concern that the government proposals have not been fully communicated to the industry and that so many landlords remain oblivious to the changes coming into force.

“The removal of the one month deposit cap is an encouraging sign as this could have resulted in thousands of potential tenants being turned away by landlords.

“The financial impact of the changes – and in particular the additional cost that landlords are set to absorb as a result of letting fee bans, is yet to be realised, so it is too soon to speculate on how this will impact on investment plans or additional costs being passed on to tenant applicants.

UK house price growth increased 2.6% in August

Note the date, August 2017 officially saw year-on-year growth of 2.6% in UK house prices, for the first time in over 12 months, new data has confirmed.

The report, from the Halifax house price index, indicates that the growth represents a rise of 0.5% on the July figure and bucks the trend of decline that had set-in over the preceding 12 months, which has seen growth fall 6.9% since August 2016.

It was also revealed that market activity has been on the increase, with 104,760 properties sold between June and July, the highest total since March 2016.

The three months to July showed activity to be 10% higher than for the same period of 2016.

Recent figures for mortgage approvals suggest some buoyancy may be returning, possibly on the back of strong recent employment growth, with the unemployment rate falling to a 42 year low," said Russell Galley, managing director at Halifax Community Bank.

"However, wage growth is still lagging increases in consumer prices, which is likely to add pressure on household finances and increase affordability challenges for some buyers.

Andrew Turner, chief executive at Commercial Trust, commented:

It is good to see some positive news on the house price front, especially during the summer, which is traditionally a slower period for the market.

“This highlights that there is still plenty of demand out there for property investment and this sets the market up for an improved final quarter of 2017.

Buy-to-let borrowing could get tougher

Funding for buy-to-let mortgage landlord applicants could become far tougher to obtain in the next few weeks as the new Prudential Regulation Authority (PRA) rules around lending money come into effect.

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This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.