14-07-2015

Fox Davidson Quarter 2 Report

Buy to let activity up, Residential down.

The Council of Mortgage Lenders* reported that lending in April was £15.8bn, down from £16.1bn in March and £16.8bn in April last year. Interestingly the April report showed remortgage, purchase and first time buyer mortgage transactions were down year on year and down by as much as 8% for First Time Buyers. However, Buy to let remortgage transactions were up by a huge 40% year on year and Buy to let purchases are up 22% year on year.

Our own data reflects the Buy to let remortgage activity with many of our portfolio landlords (more than 1 buy to let and therefore not an ‘accidental’ landlord) remortgaging their portfolios to free up capital for further investment. This would also support the argument that Buy to let property transactions are affecting first time buyer transactions.

Figures for May show lending was up slightly to £16.2bn but again down on the previous year by 3%.

Lenders do want to lend.

Lenders want to lend, that is clear. We continue to see lenders trying to price themselves into the best buys table in a bid to win more business. What the market really needs is innovation through changing lending criteria. (read our blog on Uber Innovation).

It was good to see Barclays offer some innovation as they will now lend 5 x income for loans above £200,000, previously this was set at £300,000. Additionally they have amended their interest only criteria to allow the sale of the main residence as a repayment vehicle up to 50% loan to value, you can then top up to 75% loan to value on capital and interest, subject to certain conditions such as having £300,000 equity in your home. There is still room for improvement there but they are now one of the go to lenders for interest only lending.

Kensington Mortgage Company have amended their criteria to now look at net profits for the self-employed rather than salary and dividends. Not all directors take their full dividends each year but retain profit in the company for tax reasons so it is good to see another lender showing they truly understand how the self-employed run their businesses.

National Counties have launched products to help clients at 95%, more of that is covered in the Uber Innovation blog. And so slowly but surely lenders are having their hands forced and are having to make changes to criteria to allow in more business and that can only be a good thing for the consumer.

Buy to Let

Buy to let lending goes from strength to strength. We can now secure Buy to lets up to 85% loan to value and are completing on a lot of properties that need refurbishment to make them suitable for renting. We can secure bridging finance to refurbish and immediately exit out from the lending on to prime Buy to let rates.

The same is true for development finance, we have a high number of developers buying existing property, changing the use perhaps from commercial to residential and once planning has been gained and the works completed we can refinance back out releasing the uplift in value for the next development project.

Yields for Buy to let investors remain strong in Bristol and will fit most lenders criteria for lending up to 80% loan to value. In London rental yields are only good to about 50% loan to value hence the need to use specialist lenders that will use pay rates of less than 5%. HMO lending is strong with many new lenders now in the market offering specialist products for licensed HMO’s.

TOP TIP – How to work out your max borrowing on a BTL using the market rent:

This calculation is standard across most lenders. Some niche lenders such as precise Mortgages have introduced specific products that allow you to use a figure less than 5% which is particularly useful for London property where yields are lower.

Annual rent      /125%  /5%      =          £Loan Amount

E.g. £12,000 /125%    /5%      =          £192,000

Commercial Finance

Fox Davidson are a master broker and have direct access to innovative lenders such as Shawbrook, Interbay and Aldermore as well as the high street commercial banks.

Commercial lending terms continue to be squeezed with reductions in arrangement fees and rates. New products have come to market designed to meet the needs of developers and specialist Buy to let clients. Bridging finance terms remain as low as they have ever been and again lenders appetite is there with most looking to lend more in the next 12 months than the previous 12 months.

Pension Tension

The Council of Mortgage Lenders released a report in June entitled Pension Tension. It is an area of lending we have campaigned about for a while. Their report states ‘Over a third of new mortgages being taken out today will extend beyond the borrower’s 65th birthday’

Lenders continue to penalise the older client and many have maximum ages at which they won’t lend without proof of retirement income. So if you run a successful company and are aged 70 lending is only possible from a handful of lenders or you need to consider equity release. As the CML points out ‘One factor likely to have a significant impact on retirement borrowing is the rapidly ageing population of the UK. There are currently more than 11 million people aged 65 or over (accounting for around 17% of the population). But the total is expected to grow to around 17 million (or almost 25% of the population) by 2034’.

This area of lending needs massive innovation and the first mainstream mortgage company to come out with a solution for the older client, perhaps with a product entitled ‘the life time mortgage’ will be inundated, so we won’t hold our breath.

Whilst on the subject of pensions it is worth mentioning that we have not seen an influx of pensionable age clients cashing in their pensions to buy property. We have had enquiries but certainly not the deluge of pensioners many predicted.

Housing

Hometracks’ May report shows that Oxford (12.3%), Bristol (10.9%) and London (10.1%) top the tables for year on year house price growth of UK Cities. It comments ‘Double digit growth is being sustained by a lack of supply, below average transaction volumes and a third of sales funded by cash or buy to let mortgages’.

House price to earnings ratios are in line with long run (12 year) averages apart from Oxford, Cambridge and London which are all at a staggering 11.5 x average earnings. The lowest ratios are in Glasgow and Liverpool.

According to the Nationwide Q2 House report, House prices in England were up 1.4% in Q2 and up by 5.3% year on year. Price growth in the South exceeded that in the North for the 25th consecutive quarter. Prices in Southern England (South West, Outer South East, Outer Metropolitan, London and East Anglia) were up 6.3% year-on-year, whilst in Northern England (West Midlands, East Midlands, Yorkshire & Humberside, North West and North) prices rose by 2.7%.

The top 5 UK performing Towns/Cities were:

  1. Reading                       (13% growth year on year)
  2. Oxford             (12%)
  3. Coventry         (10%)
  4. Brighton                       (10%)
  5. Bristol              (10%)

And the worse UK Towns/Cities:

  1. Sunderland      (-4%)
  2. Belfast             (-3%)
  3. Nottingham     (-2%)
  4. Plymouth         (0%)
  5. Glasgow          (0%)

Read the full report here:

http://i.emlfiles5.com/cmpdoc/1/1/2/7/files/303851_nw-hpi-q2-reg.pdf?utm_source=NFI&utm_medium=email&utm_campaign=5887710_June+HPI+and+Q2+combined&dm_i=5KB,3I6ZI,APNUB8,CK4CC,1

Bristol

In Bristol we are still getting reports from the estate agents of cash buyers from London as well as local Buy to let investors buying up property in the City, all of which is adding pressure to the already heavily outnumbered amount of properties for sale compared to the number of first time buyers trying to secure a property in the City. Stock or lack of it remains key in Bristol as it does across other UK Cities.

Hot Spots for housing taken from our own activity continue to favour BS3 and BS4 postcodes for purchase activity.

Interest Rates

The Bank of England has held interest rates at 0.5% since March 2009.

The Bank of England’s quarterly credit review is a survey of UK lenders as to how they view the current and next quarter for lending and  interest rates. In their Q2 report the results show that lenders expect rates to fall further and that supply and demand will increase over the next 3 months.

Residential re-mortgage activity is definitely picking up and with 2 year fixed rates averaging at round 1.8% and as low as 1.05% for a 2 year fixed rate (which is below most lenders variable rates) this should be reason enough to remortgage and save money.

The Bank of England are predicted by many to raise interest rates in 2016. The consensus is for rates to raise by 0.25 basis points in Q2 of 2016. Economist, Capital Economics expects a rate of 1% by end of 2016 and 1.5% by the end of 2017.

Rate rise predictions are never terribly accurate and there are so many outside factors including oil prices and happenings in Europe that no one can say for certain when rates will increase.

Swap rates (which form the basis for the price a fixed rate is offered by lenders) have been steadily increasing for the last 3 months. We would usually see these increases reflected in the rates lenders are able to offer but the current market is competitive and lenders continue to take the hit on profit margins to gain new business and it is unlikely rates will increase until perhaps next year and then only marginally.

Q3 Looking Forward

RIC’s and Rightmove surveys report increased demand from buyers in Q2 so it is likely we will see a much busier second half of the year compared to the first half. Lenders surveys also report increased demand and forecasts are for gross lending to increase in the next quarter.

We can safely say ‘record low’ interest rates are here to stay for at least another 6 months so make the most of the record low rates whilst you can.

Summer budget changes (read our summary here) may have some effect on landlord’s appetite for Buy to Let. Initial feedback from seasoned portfolio landlords is that it is annoying but not a game changer. We may see more appetite for Ltd company buy to lets as they are not subject to the new rules, only individuals are.

*The Council of Mortgage Lenders’ members are banks, building societies and other lenders who together undertake around 95% of all residential mortgage lending in the UK. There are 11.1 million mortgages in the UK, with loans worth over £1.3 trillion.