The 95% mortgage conundrum

November 6th, 2017 . Tags: ,
Posted in Help to Buy |

In 2013, Help-to-Buy was released in a flurry of excitement – first-time buyers could get onto the property market with a 5% deposit and lenders were cushioned in the event of the homeowner defaulting on a mortgage.

The Help-to-Buy 95% mortgage loan-to-value guarantee scheme saw 20% of the mortgage amount underwritten by the government to encourage lenders back to the marketplace (after the FCA set strict lending criteria) by limiting their potential losses. While the later Help-to-Buy equity loan saw the government lend up to 20% of the cost of a new build home (up to 40% in all London boroughs since 1 February 2016), provided the buyer could find 5% cash deposit and a 75% mortgage – however, after five years, interest was due on the government loan and the government due its share of the equity growth or loss on its sale. The situation as it stands currently is that the mortgage guarantee scheme was discontinued in December 2016 while the equity loan scheme will continue until 2021, as confirmed by then Chancellor, George Osborne in November 2015.

This month, October 2017, Theresa May said the government will find an extra £10bn for the Help to Buy scheme to let another 135,000 people get on the property ladder. Details of this funding are due to be announced in November’s Budget.

This additional support raises some interesting questions. Why has only the Help-to-Buy equity loan continued? And why can’t the principle of an underwritten mortgage scheme be used to help first-time buyers who would like to buy a period property rather than a new build?

After all, what is the difference between a Help-to-Buy mortgage and a 95% loan-to-value (LTV) mortgage anyway? For many lenders, this is the most interesting question. Help-to-Buy was essentially a 95% mortgage that the government guaranteed (in part) that encouraged lenders to offer higher LTV ratios than they had previously. The mortgage for first-time buyers of new builds gave the property market a much needed boost.

To answer why one element of the Help-to-Buy scheme is continuing when the other hasn’t, it’s worth considering the house builders themselves. Currently 60% of new properties are built by ten companies; it stands to reason that those ten companies just can’t keep pace with demand. With the mortgage guarantee element scrapped but a continuation of the equity loan scheme, the government seems to be keen to support the developers who have already invested in future projects to increase the housing stock.

Two important things have happened since the introduction of Help-to-Buy then: one, developers have been supported to increase the much-needed housing stock and two, after seeing the reality of 95% mortgages, lenders are now feeling comfortable enough to increase the scope of the rest of their products. Proof of this is the fact that some have begun to offer mortgage products at high LTV ratios without government support and outside Help-to-Buy’s remit. These low-deposit mortgages are perfect for people who are already homeowners, perhaps young families, looking to take the next step but not able to save the finances to do so thereby helping to keep the market fluid.

Without governmental underwriting however, there are fewer products available in the 95% LTV range. The 95% mortgages are a higher risk for the lender (obviously without the government’s underwriting) and are likely to have higher interest rates. At the time of writing the comparison between the interest rates for Help-to-Buy and 95% mortgages is stark. Help-to-Buy: 1.39% (two-year fixed interest) versus a 90-95% LTV product at 3.89%.

So in much the same way as Help-to-Buy supported first-time buyers to buy a new-build, could the same principle be applied to support first-time-buyers to purchase a period property or a so-called ‘second-hand’ property? Could the government extend its underwriting support to all 95% LTV mortgages? According to Sarah Davidson in This is Money’ from January this year, the leap from 49 Help-to-Buy products in 2013 to 242 in 2017 shows that the Help-to-Buy scheme stopped lenders from seeing first-time buyers as ‘risky’ customers. In fact, since its launch, the scheme has helped more than 200,000 buyers, accounting for one in 12 of all first-time buyer transactions.

If the government could be encouraged to re-enter a mortgage guarantee scheme which included second-hand properties, as opposed to purely new-builds, then surely it would open up the housing market and give an entire swathe of the population some financial flexibility and better life choices, especially in areas of the countries where new-builds are not so prevalent.

If you would like to discuss first-time-buyer mortgages or the Help-to-Buy equity loan options that are available to you and find competitive rates, make contact with the Visionary Finance team today.


Buy-to-let mortgage changes for portfolio landlords

October 10th, 2017 . Tags: ,
Posted in Landlords |

From the 30th of September 2017, the Prudential Regulation Authority will implement changes to the way buy-to-let mortgage applications are assessed for portfolio landlords.

It seems that the Government and financial regulatory authorities are not prepared to forgive and forget that careless mortgage lending played a significant part in 2008 global financial crisis. Tougher mortgage assessments have already been implemented for private residential property owners and now it’s the turn of portfolio landlords.

Portfolio landlords are defined as having four or more distinct mortgaged buy-to-let properties, either together or separately, in aggregate. They are currently assessed for a buy-to-let mortgage based on the rental income and property value of the property they are applying for. Lenders may limit the number of buy-to-let mortgages that can be taken out with them but don’t concern themselves with mortgages a landlord may have with other lenders. So buy-to-let portfolio landlords have always been able to mix and match to get the best deal, and spread outgoings across their portfolios as standard practice. For example, the majority of their buy-to-lets are profitable then they cover any shortfalls on the ones that aren’t. For buy-to-let landlords, the business has always been about finding the balance between outgoings and profit.

In recent years, that business has experienced a few hurdles however. The Wear and Tear tax allowance has been removed; an additional 3% Stamp duty is now charged on second or more property purchases; from April this year, tax relief has begun its tapering descent from 40% to 20% by 2020; and now, for any buy-to-let mortgage application, lenders will have to assess the value and risk of the whole portfolio.

Yes, the whole portfolio. Lenders will have to work out the amount of aggregated debt, the cash flow and associated costs from multiple properties alongside the risks from the property itself. What’s more, they will assess the landlord’s history in the business to work out their risk.

Depending on the lender’s comfort levels, their decision to lend will be based on a landlord’s property investment experience, total borrowing across all properties, assets and liabilities (including tax obligations), total income and whether the new application will add to or detract value from portfolio. Landlords are advised to keep an up-to-date property portfolio spreadsheet, business plan and cash flow forecasts, the past three months’ bank statements, SA302s, tax return documents and tenancy agreements handy.

In addition, lenders will apply a stress test to the loan based on a landlord’s ability to pay should the interest rate rise above 5.5% (between 4% to 5.5% on 5 year fixed rates) and only once the affordability criteria has been met will a lender consider the mortgage based on whether the property’s projected rental value would equal 145% of the monthly mortgage payment.   Plus the whole process will need to be repeated for every new mortgage application or refinancing. The fallout from the 2008 financial crisis is still being felt and all this is to make sure that lending is responsible.

For lenders, it goes without saying that the volume of paperwork will increase exponentially and for some, buy-to-let mortgage products will become more trouble than they are worth. So are landlords facing a dreary future of paperwork, more expensive mortgages with fewer product options? Perhaps, but the likelihood is most lenders will “up-skill their underwriters” while other specialist buy-to-lenders will simply diversify their products to take into account the changes. It also will make brokers more important than ever.

Julian Sampson, Partner (Lending and Real Estate) at TWM Solicitors, also advises: “What has become apparent since the PRA announcement is that lenders have been waiting on each other to release details on how they are treating portfolio borrowers. This, in turn, has knocked onto the intermediary community.

“Those most capable of assisting in such short notice have been those with the internal capacity to assess each lender’s requirements in short measure, which means turning to specialists rather than dabblers will be the most important outcome.

“Landlords should already be able to identify their weakest assets, and the PRA changes will mean underwriting in the round will not be achievable. Therefore, Landlords should look at their leverage positions generally, and work to even their collateralisation as best possible.”

Brokers could end up being the buy-to-let saviours. Advising portfolio landlords on what information needs to be submitted, what products on the market best suit their needs (including a wide selection of specialist lenders often with preferential rates based on their business relationship with the broker), experience navigating the waters of complex buy-to-let finance and whether listing the business as a limited company is worth considering for tax purposes.

Sampson adds: “The macro-economic situation in the United Kingdom means that buy-to-let remains a vibrant market, and whilst it will suffer its fears alongside other areas, it will remain a strong stable market for those Landlords who control leverage, act professionally and keep abreast of legislative changes such as the Energy Act impact on EPC’s next year. Buy-to-let will continue to see new lending entrants and growth in 2017, and so they clearly foresee this is an area worthy of their funds.”

Vidhur Mehra, Finance Director at Benham & Reeves Residential Lettings advocates making sure your “house is in order”. This means ensuring that the information you need regarding your properties is up to date, organised and readily available. Vidhur insists this will be invaluable in assessing any impact of the changes.

We also asked Vidhur what’s the most significant change on buy to let mortgage changes for portfolio landlords? And in this case how should landlords approach it?

  • Regulations: whilst sometimes onerous, they are there for protection which is beneficial to the market overall.
  •  Excessive borrowing can become a problem. The stress tests will become an important consideration.
  •  Using debt finance is sensible but plan ahead and don’t over-leverage

In the uncertainty of September’s changes, this advice and support will be invaluable. Matching the portfolio landlord and their mortgage requirement with the right lender will make a huge difference in terms of time, effort and cost. So why not make an appointment to talk through your buy-to-let borrowing options with Visionary Finance today?


Updated: 11th October 2017

The cautionary tale of the interest-only mortgage

September 28th, 2017 . Tags: , ,
Posted in Landlords |

There was a time that interest-only mortgages were viewed as a win/win option because for the term of the mortgage, the repayments were only the interest on the loan. For people looking to buy their own home, they were a lower-cost option that meant homebuyers could buy a higher value property than they could have considered on a repayment mortgage (though still subject to the normal affordability checks) or limited by their own variable income when applying for a mortgage.

For landlords, they were a low-cost, high-profit investment that could be sold to clear the mortgage debt once the repayment period ended. So why did the Financial Conduct Authority refer to them as a “ticking time bomb”?

Simply because not enough emphasis, then and now, has been put on the need for a strategy to repay the underlying debt. According to the Council of Mortgage Lenders, one in ten families has no idea how they will pay off their loan when they reach the end of the term and still owe the amount they borrowed. Even those who have made provisions, such as a feeder account that they can pay extra into or an endowment policy linked to the stock market, may find that the final amount falls way short of the loan. Without the ability to raise the necessary funds, they will have to sell their homes to clear the debt.

Holly Thomas writing for The Guardian notes that interest-only mortgages are: “Seen as one of the worst examples of irresponsible lending in the years running up to the credit crunch, when their popularity soared. The majority of deals were taken out without any proof that borrowers could pay off their debt.” Obviously with today’s tightened mortgage affordability checks, no new interest-only mortgages are being approved without a water-tight repayment plan but that doesn’t help the two million people who have the debt deadline looming and have failed to make any repayments. Nor does it help those who have consistently made repayments into a stock market-linked endowment policy or ISA and are finding the amount is far lower than will be needed.

So what can be done? Taking independent financial advice is the best course of action. For some, there may be time to switch to a repayment mortgage or even for a portion of the mortgage if a repayment ISA or endowment policy has fallen short. For others, it may be possible to apply for a new, more appropriate, mortgage on the basis that property values have risen and circumstances have changed. Downsizing to another property is always an option or negotiating to make overpayments or extend the term of the existing mortgage are viable considerations too. There is another element to the interest-only story however, and that is the number of pensioners facing the “interest-only time bomb” for whom the above may not be possible.

Research by More 2 Life shows 41% of over 65-year-olds, 37% of 65 to 74-year-olds and 56% of 75 to 84-year-olds have an outstanding interest-only mortgage. Naturally, mortgage age limits prevent them from being eligible for a new mortgage arrangement or even negotiate their existing mortgage arrangement; setting up a repayment or endowment or even overpaying may be too little too late and selling may be the only option, provided they are eligible for a new mortgage deal. It is a pretty worrying state of affairs and one which is currently being investigated by the FCA.

For pensioners facing this problem, equity release is a serious consideration – essentially using the value of the property to pay for it. Figures show that £1.25bn has been released from homes in the first half of 2017 alone, that’s £6.9m a day, according to Key Retirement, and it will have been used, amongst other things, to pay off interest-only mortgage debts. Equity release firms are no doubt carrying out due diligence that the mortgage can be repaid in total from their payments (otherwise there may be legal implications over the ownership of the property with the mortgage lender once the occupant passes away). It has also led the Council for Mortgage Lenders to warn that for some, the equity in their homes isn’t sufficient to pay the mortgage debt.

For many reasons, the Financial Conduct Authority was right in its assessment. Interest-only mortgages require a great deal more thought than many were initially led to believe was needed. If you have an interest-only mortgage, or are interested in applying for one, make an appointment with Visionary Finance to discuss your options thoroughly and make informed decisions. As an independent FCA-regulated broker, we will discuss with you the best offers available in the marketplace to suit your personal circumstances.

Help to Buy: what’s on the horizon

September 28th, 2017 . Tags:
Posted in Help to Buy |

Back in 2013, against a backdrop of tentative economic recovery driven by the property market, the government introduced an inspired home buyer’s scheme known as Help to Buy. It would encourage more people to market by giving first-time buyers a helping hand with the deposit or mortgage costs especially when rising prices and stringent affordability tests were locking many buyers out.

Under the Help to Buy Equity Loan, the government lends up to -20% of the purchase price (up to 40% in London) to help buyers to get on the housing ladder, especially helpful for those who are perhaps struggling to save a deposit.

The Help to Buy ISA scheme boosts savings by 25% to help towards a deposit and in addition, the Help to Buy Shared Ownership scheme allows people to buy a portion of their home if they can’t afford mortgage payments on the full amount. They pay rent on the share of the property that they don’t own and can buy greater shares when they are able to.

With so many options, first-time buyers are no longer finding the first rung of the property ladder out of reach and house builders are experiencing a welcome boost in demand.

The good

In fact, figures from the Department for Communities and Local Government show that Help to Buy has been responsible for £17.7bn worth of properties; for between a third and a half of all new-build transactions; for 80% of purchases by first-time buyers; and for 14% of all new residential builds. More than 100,000 people have benefitted from taking out a Help to Buy loan in one form or other.

New builds are particularly attractive under the scheme because only a 5% deposit is needed. Legal and General Mortgage Club noted that between 35-40% of its new build sales were through the scheme. So news that Help to Buy is under review and that’s its future is uncertain has been greeted with concern from all corners.

The bad

For all its success, the scheme has drawn criticism. Some financial experts have commented that the three different elements – the Help to buy Equity Loan, the Help to Buy ISA and the Help to Buy Shared Ownership – make it unnecessarily confusing. Other market watchers have noted that in creating a swathe of first-time buyers, it has boosted demand beyond housing stock capacity and driven up house prices further.

Liberum analysts commented that many people are using the scheme “do not actually need it” and there is the worry that house builders are setting too much store by the scheme. According to Emma Haslett writing for City A.M., more than 50% of sales at Persimmon are Help to Buy, a figure that is 40% at Taylor Wimpey, Galliford Try and Redrow.

The ugly

Further proof of house builders’ dependence on the scheme came in the form of a drop in share prices when an independent review by the London School of Economics was announced. Shares in Barratt, Taylor Wimpey and Persimmon fell by 5%, Bellway and Crest Nicholson fell 3.5% when it was rumoured that all options for the scheme’s future were being considered.

Once the Department for Communities and Local Government (DCLG) announced that the LSE evaluation was part of a regular review process, house builders recovered their share values. But it shows that Help to Buy has become a vital part of the property market, something that LSE will no doubt take into consideration.

Despite the initial panic, there is little likelihood that the scheme will finish before its scheduled 2021 end date. Some possibilities are that the scheme ends abruptly in 2021, or there is a tapering-off up to or after 2021, or the property price cap of £600,000 could simply be lowered and Help to Buy continues. In fact, new housing minister Alok Sharma commented: “We have committed £8.6bn for the scheme to 2021, ensuring it continues to support homebuyers and stimulate housing supply. We also recognise the need to create certainty for prospective homeowners and developers beyond 2021, so will work with the sector to consider the future of the scheme.” Home buyers and builders will await the LSE’s review with great interest.

If you would like advice on how to make the most of Help to Buy over the next four years then make an appointment to speak to the Visionary Finance team.

Bank of England given new powers to curb risky buy-to-let lending

November 18th, 2016 . Posted in News |

The Bank of England is gaining powers to curb any lax lending in the fast growing buy-to-let mortgage sector, an area it has identified as posing a potential risk to the financial system.

The Treasury is to give Threadneedle Street the ability to restrict the size of loan relative to the value of a property and also limit the size of loans relative to the amount of rent landlords receive to cover interest payments.


Source: The Guardian

Stamp duty reforms are damaging property market and cutting tax take

November 15th, 2016 . Posted in News |

Stamp duty reforms have slowed the housing market and raised half as much money as the Treasury predicted, it has emerged, amid calls for Philip Hammond to review the tax.

The Exchequer received £370 million less in stamp duty than the £700 million it expected following major changes made by George Osborne, new analysis shows.

Experts also said it led to a steep decline in property sales and has cost the economy nearly £1 billion because of a reduction in the number of people selling homes and a flow-on reduction in demand for services such as removals or renovation.


Source: Telegraph



UK House prices now cost 6 times annual wages

November 4th, 2016 . Posted in News |

The typical UK home now costs six times average annual earnings, even though house price inflation is slowing, according to the Nationwide.

The last time the prices/earnings ratio was so high was more than eight years ago, in March 2008.



Rents to rise faster than house prices, say Savills

November 4th, 2016 . Posted in News |

Rents across the UK are set to rise considerably faster than house prices over the next five years, according to property agents Savills.

It forecast that rents will go up by 19% between now and 2021, while house prices will only rise by 13%.

The gap will be even more pronounced in London, where it said rents will rise by 24.5%, and house prices by 10.9%.




BTL lender bombshell will lock thousands out of market

May 2nd, 2016 . Posted in News |

Thousands of landlords will be locked out of the buy-to-let market after the market’s second biggest lender severely tightened its criteria, say experts.

Earlier today Nationwide subsidiary The Mortgage Works announced it was increasing its rental cover requirements from 125 per cent to 145 per cent and cutting its maximum LTV from 80 per cent to 75 per cent from 11 May.

The Mortgage Works said the move pre-empted government tax relief changes being introduced next April.



Buy-to-let landlords triple since 1980

April 15th, 2016 . Posted in News |

Nearly six per cent of households are receiving income from rented properties – a figure that has tripled since the 1980s, according to new data from the Office for National Statistics.

The buy-to-let boom has grown at a rapid pace since the onset of the financial crisis, with the proportion of households reporting income from rent rising from 3.8 per cent to 5.6 per cent in the last six years alone.

Landlords have also benefited from rising equity, with house prices up substantially in the last few years, potentially making many ‘property millionaires’.

This growing army of landlords has had a huge knock-on effect on younger Britons – dubbed ‘generation rent’ – with an explosion of those aged 26 to 30 now privately renting a home because they cannot afford to buy.