04-05-2016

Quarter 1 Report 2016

Q1 of 2016 has been a very busy quarter and follows on from a unusually busy December.

The changes to stamp duty resulted in an increase in purchases of second homes from auction and development project purchases, holiday homes and buy to let properties – anything that gave rise to the increased tax was rushed through before the new rates of stamp duty tax kicked in.

The Council of mortgage lenders reported that in March £25.7bn of mortgages completed which was 59% higher than March 2015 and 43% higher than the previous month of February. Gross mortgage lending for Q1 2016 totalled £62.1billion. This is 39% higher than Q1 2015.

Mohammad Jamei, CML economist, said: ‘Against a backdrop of a recovering market, the substantial jump in lending in March was significantly influenced by a late surge of activity to beat the Government’s stamp duty change on second properties.

‘The distortion caused by this stamp duty change appears to be larger than any previous stamp duty change we’ve seen.

‘As a result, we expect there will be about 10,000 fewer mortgaged transactions each month in the second quarter of 2016 than would otherwise have been the case, offsetting the increase in activity seen in March.’

At Fox Davidson it was all hands on deck to ensure that all of our clients completed in time and we are glad to report that by the end of March ALL of our clients had completed in time and avoided the extra tax.

The property and mortgage market is now a different place to operate in. We will see many more clients buying semi-commercial property or commercial property to avoid the extra stamp and many more again buying residential property through a Ltd company to avoid the changes to income tax.

Property & Funding

More lenders are now coming to the market and offering Ltd company buy to let mortgages. Specialist buy to let and commercial mortgage lenders have been first to offer these products and from our regular meetings with the banks we are told that several of the high street banks are looking at coming to market and will launch but will likely wait for a competitor to launch at the same time to save being inundated, watch this space.

Existing lenders need to bring innovation to the market. The market is typically underserved in the post state retirement age area, the self-employed are still treated as second class citizens by some lenders and clients earning in a foreign income have been hit hard due to the European Mortgage Credit Directive.

It was good to see Paragon (a specialist buy to let lender) changing its policy for Limited company buy to let mortgages. Paragon will now allow other mortgage lenders to lend to a Limited company that it has already loaned money to, previously that dictated exclusivity of lending to a ltd company.

Lenders buy to let calculations to get from rental income to max loan have remained under close scrutiny from the FCA and only a few mortgage lenders are offering calculations below the usual ANNUAL RENT /125% /5% calculation. If you can keep your loan to value below 65% or are happy on a 5 years fixed rate, then the calculation becomes more favourable.

The increase to stamp duty for those owning more than one residential property on completion of a purchase certainly helped to push up property prices in the last quarter.

Given the rise in residential stamp duty will we now see a rise in the purchase of commercial or semi-commercial property? Some examples of semi-commercial property include; Shops with flats above them, pubs with owner accommodation or guesthouses and Bed & Breakfast properties with owner accommodation. In general, for a property to be considered commercial it should be more than 40% commercial.

Funding of commercial property is possible through commercial lenders but also through some specialist small lenders including building societies and broker only commercial mortgage lenders. Rates vary from as low as 2% over bank of England base rate up to around 6%. For commercial investment and owner occupier commercial mortgages visit our commercial finance pages for more information.

House Prices

Hometrack which tracks the top 20 Cities in the UK, reports that inflation was up to 11% (compared to 8.1% in February 2015). Portsmouth, Nottingham & Birmingham have recorded the highest rates of annual house price growth for over 10 years.

Compared to the 2007 property prices Bristol has seen increases of 22% and Cardiff 6%. The big guns are London (49%), Cambridge (50%) and Oxford (39.8%).

Richard Donnell, Insight Director at Hometrack says:

“There has been a notable and unseasonal acceleration in city level house price growth in the last three months. 16 of the 20 cities covered by our index are registering an annual rate of house price growth that is higher than 12 months ago. As the housing recovery spreads some regional cities are recording their highest growth rates for over a decade. Four cities have seen the rate of growth slow, with Aberdeen and Belfast hardest hit. Belfast in particular has lost momentum where a modest recovery appears to have stalled with house prices still 45% down on their 2007 levels”

“While there is a lot of focus on the impact of investors buying ahead of the April stamp duty deadline the vast majority of demand for housing comes from existing homeowners who account for 80% of sales. The pick-up in growth across the UK cities has more to do with a lack of supply and increased demand on the back of the improving economic outlook and low mortgage rates.”

Interest Rates

The Bank of England held interest rates at 0.5% in March which was a record 7th year at 0.5%, who would have thought it!?

A report in April from Lloyds comments ‘Looking at prevailing forward interest rates the market looks to expect interest rates to increase in mid 2020 and even then it will only increase gradually. Given the weakness of inflation and recent dovish comments from the Bank of England, we too have recently shifted our view. Last month we pushed out our call for the timing of the first tightening from this year to late 2017. The risks surrounding this forecast, however, remain high.

Mortgage rates remain at record lows and it would seem could stay at record lows for the rest of this year and well into 2017.

Looking ahead….

Brexit will continue to have an effect on the strength of the pound and will menacingly cause uncertainty within the various stock/housing/money markets. Property prices look set to continue to increase due to lack of supply and buy to let looks to get even tougher as lenders like TMW announce even stricter lending criteria for rent to loan calculations.