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