We’re still living in credit crunch land, according to the Council of Mortgage Lenders. Loans to first time buyers and movers were down in 2014, so were remortgages, as owner occupiers were hit by the Mortgage Market Review and affordability constraints – but buy-to-let (BTL) lending has increased 32 per cent each year for the last two years. Predicted growth for in 2015 is much more considered – at around 12 per cent.
In a world where house prices have sidelined first time buyers, there’s a huge demand for rented property and that’s good news for landlords. Gross rental yields, on average, have stabilised at 5 per cent, according to YourMove and when house price increases are added in that gives annual returns of 11.5 per cent. With low interest rates, and low yields available from other assets, investors are searching for cash – and that means both supply and demand side of the equation are making BTL the place to be.
For once, lenders are willing to back landlords. Paragon says its BTL lending rose 58 per cent in the last quarter of 2014, and it expects to see strong tenant demand continuing to drive high growth levels in the current year.
GET FIXED UP
With interest rates continuing at low levels, there are some great deals around. Rachel Springall, finance expert at Moneyfacts, says the best buy list includes a five year fix at 3.89 per cent, from Post Office Money, with a relatively low £995 fee. For first time landlords, Virgin Money, Cumberland, Coventry, Loughborough building societies, and the Woolwich (Barclays) all offer attractive deals, mostly at 75 per cent loan to value – even better deals can be had if the landlord can stump up a 40 per cent deposit, with Virgin Money offering 2.89 per cent and the Cumberland Building Society coming in at 2.29 per cent.
Things are a little more difficult for multi-property landlords and those buying non-standard properties such as houses in multiple occupation (HMOs) or ex-local authority housing. Keystone is one lender that’s worth trying for these properties – it says it aims “to give a home to buy to let deals that won’t fit other lenders”. It also takes on landlords who may not be standard – for instance, a vicar landlord who fails the usual test of owning his own home since he lives in the ‘company flat’, expat landlords, and landlords with larger portfolios who are often excluded by more mainstream BTL lenders.
Steve Olejnik, sales director at Mortgages for Business, says, “The larger your portfolio, the more limited your options are.” These landlords will need to look at specialist lenders – challenger banks, check out Kent Reliance, or Keystone.
Some lenders are more pedantic than others with regard to their lending criteria, you need to to tick their three main boxes.” Matthew Rowne, The Buy To Let Broker.
Matthew Rowne, senior BTL specialist at The Buy To Let Broker, says that, “Some lenders are more pedantic than others with regard to their underwriting criteria.” Landlords now really need to “tick all three boxes” – proof of deposit, a clean credit record, and minimum income – whereas back in the boom, he says, “you’d get a mortgage even if you didn’t tick all the boxes.” However, minimum income isn’t the most difficult box to tick – it’s generally set at £20-25,000 and the two largest lenders don’t prescribe a minimum income level.
PENSION POT INVESTORS
New pensions freedoms, which start this April could have an impact on the BTL market. There has been speculation that a large number of individuals may withdraw their whole pension pots on retirement in order to invest in BTL property. The average pension pot in the UK stands at £72,134; while that won’t buy much, use it as a 25 per cent deposit on a BTL mortgage and it scales up to £288,536, which you can do quite a bit with.
Another few numbers to juggle with; according to Hargreaves Lansdown, 16 per cent of those who plan to take out their entire pension pot in cash expect to invest it in property. That’s 32,000 new landlords. If they bought one property each, that would account for around five per cent of total UK residential transactions.
Ray Withers, of Property Frontiers, believes there will indeed be interest, but he warns that average pension pots are not large enough to access the central London market. He also suggests individuals should spread their investment across two or three lower priced properties to minimise disruption from voids and give some diversification. Newbuild apartments in central Liverpool can be had for £64,950, he says, and Belfast, where property prices are still 45 per cent below their 2007 peak, also offers potential.
Neil Woodhead of Castle Estates says he’s already seeing older investors buying into the property market. “They’re looking for income stream, not capital growth,” he says – a big shift in attitude since the days before the credit crunch. He’s seeing landlords diversifying, selling their larger and more expensive properties to buy a number of smaller ones in cheaper areas, and get higher yields.
“One client,” he says, “sold a new build because he was barely breaking even, and bought and modernised three small ex council flats out of the proceeds.” That pushed his rental income up from £550 to £1050 a month. But he is worried some pension pot landlords will try to go it alone and warns such strategies rely on intensive research and expertise in the local market.
75% of pension pot withdrawals is taxable. The gains from property investment would have to be huge just to recoup that loss.” Jamie Smith-Thompson, Portal Financial.
But new pensions freedom comes at a price. Only 25 per cent of cash taken out as a lump sum is tax-free – the same as before the changes; the other 75 per cent will be taxed at the individual’s highest marginal rate, so up to 45 per cent of that amount could go back to the tax man. Jamie Smith-Thompson, Managing Director of Portal Financial, says, “the gains from property would need to be huge just to recoup that loss,” even before maintenance, insurance, agency fees, stamp duty and voids are factored into the equation.
His views indicate the possible fly in the ointment – independent financial advisors (IFAs) aren’t terribly enamoured of BTL. Rachel Springall says that while there’s scope for pensioners to cash in their chips, “a buy-to-let investment is also a risk, so it is likely that pensioners will not enter this market without good upfront advice from an independent adviser first.” The IFA is likely to be the gatekeeper – and right now it seems many of them want to keep that gate firmly shut.
After all, investors who want to use property as an investment could hold commercial property inside a SIPP, which would not only mean no tax on taking cash out of the pension, but they’d benefit from tax-free rental income too as well as escaping capital gains tax on any sale. 5.5 per cent average yield – more on smaller, secondary properties – isn’t bad, leases are longer term than most residential contracts, and with all the tax advantages, it’s hard to see an IFA suggesting residential is a better bet.
Financing could also be a problem for some, as Steve Olejnik warns most lenders won’t allow borrowers to be over 75 at the end of the loan, ruling out 20 and 25 year mortgages for the 55 year old wanting to use his pension pot. The Mortgage Works, on the other hand, will lend to anyone under 70 at the start of the loan, while Keystone, Aldermore and Kent Reliance will let a mortgage run to age 85.
Like the overall housing market, the BTL market has become polarised. Matthew Rowne says, “It’s almost two different markets; in London it’s about capital appreciation, in the north it’s about yield.” He knows one landlord who’s buying properties around the M65 for £20 – 40,000 and getting yields of 15-20 per cent. “London people just don’t understand it – he’s getting no capital appreciation at all!”
While central London and the southeast have been attractive markets for capital appreciation focused investors, the search for yield is pushing investors into other markets. Yields now are as low as 2.7 per cent in Hammersmith & Fulham; in income terms, investors would be better off keeping their money in a fixed term deposit account. On the other hand Midlands and northern cities offer yields above seven per cent – achievable in Manchester, Nottingham, Hull, or Leeds – as well as lower average property prices.
Rowne says landlords are now looking for ways of stretching tight yields; in London, by focusing on ex-local authority properties (which many lenders now accept), and across the country by looking at HMOs.
sexy or standard?
Some landlords are now also looking at multi-unit investments, which yield slightly more even than HMOs – 9.3 per cent on average against 9 per cent for HMOs, and 6.3 per cent for standard BTL investments. That means quite a few portfolio landlords are now looking out for properties they can divide up – former pubs and hotels, larger houses, or even old commercial buildings, as well as small blocks of flats.
Housing Association stock often fits the bill, relatively cheap to buy, but it will attract good long term tenants.”Neil Woodhead, Castle Estates.
Neil Woodhead says in terms of more standard investments, most of his landlords have found ‘sexy’ executive apartments are too pricy to give good yields, so instead they are looking for properties for working couples and families. Ex council and Housing Association stock often fits the bill; “It’s relatively cheap to buy, but will attract good long term tenants,” he explains, and adds, “In some areas I am experiencing higher rents for a three bed terrace in an ex council house area than a three bed apartment new build.” Benefits tenants can be higher yield, but are probably not ideal for the inexperienced landlord.
A tight rental market and relatively relaxed lending suggest the buy-to-let boomlet has some way to run. But there is one dark cloud on the horizon. According to Simon Whittaker, finance director at Mortgages for Business, five- and 10-year swap rates bottomed out in January and have now bounced by 0.25 per cent. That may not put pressure on the market yet – rates are still low – but any further move in swap rates could push fixed mortgage rates up. Landlords who want to fix should definitely do so earlier rather than later.