Coventry Building Society increases rental requirement

Coventry Building Society has become the latest lender to raise the rental income requirement on their Buy-to-Let mortgages. As of this week their calculation has increased from 125% coverage to 140%.

This follows a string of lenders who have reviewed their policies in response to a Bank of England consultation earlier this year. The regulator has put a focus on affordability and stress testing to ensure that Buy to Let mortgages remain sustainable, even if costs rise.

Lenders including Coventry, The Mortgage Works and Barclays have already taken action, changing their criteria to account for future increases in costs and the potential for lower profitability.

Clearly property investors need to be aware of the increasing costs, including changes to tax relief, over the coming years and take account of this when planning any future purchases. 

The good news is that Buy-to-let rates are currently very low, so now is a good time to review any existing mortgages and look at cutting outgoings now.

Guild Mortgage Service, Provided by London & Country Mortgages

In the last budget George Osborne announced that tax relief for landlords is to be cut, limiting the amount of income they can offset against mortgage interest payments. While the detail is fairly convoluted the basic outcome is that many, if not most, let properties will be less profitable – or indeed make an annual loss (though it’s to be hoped property price growth will ultimately overcome this).

The change is to be phased in and won’t be fully in place for another four years but already landlords will be starting to feel the pinch.

In recent weeks lenders have started looking ahead to the full reduction in tax relief and tightening lending policy as a result: if the property will be less profitable in a few years time, they reason, we should assess it on those terms today.

The first and biggest name to go was The Mortgage Works, increasing their requirement from 125% coverage to 145%. So for example, under the previous policy a £150,000 loan at a notional rate of 5.50% would cost £687.50 per month. 

The Mortgage Works wanted an extra 25% coverage of that, so to qualify for the £150,000 loan landlords needed £860 rent per month. Under the new policy they would need £997 per month – almost £140 more.

Other lenders have started to follow suit including Barclays, Keystone and Newcastle, and it’s certain all lenders are reviewing their stance though many have yet to make a move. 

So how should landlords react to this? 

While many lenders have yet to tighten policy, that’s not necessarily a signal to get in before they do – the driving force behind this is that, all other things being equal, most buy to lets will perform less well in the future. 

But it does present an opportunity to review current properties and try to mitigate the impact: securing a low rate now could cut outgoings and help build up a reserve to either cover rental shortfalls or reduce the mortgage in future.

Increasing rent is an option too of course, and no doubt many will, but there’s naturally a limit to how far this can go, determined by local housing supply and incomes. 

Clearly any planned purchase needs to be assessed on how it’s going to work in a few years time, not just at the outset.

If you are an existing landlord or are considering purchasing a Buy-to-Let property, and need mortgage advice, then please speak to the Guild Mortgage Service provided by fee free L&C Mortgages.

You can contact L&C mortgages on: 0800 073 1945

UK HOUSE PRICE INDEX: APRIL 2016 (released 14 June 2016)

[The new UK House Price Index comprises figures collated by the Office for National Statistics from data supplied by Land Registry, Register of Scotland, Land and Property Services, Northern Ireland and the Valuation Office Agency. In addition, there are separate detailed reports for England, Wales and Scotland. New statistics are included relating to the status of the building (new build or existing resold), the buyer (first time or repurchase) and the funding (cash or mortgage). The following summary looks at some aspects of the overall report for the UK and the detailed report for England]

The new April 2016 house price index data for the UK showed a monthly rise of 0.6 per cent in average house prices across England, Wales, Scotland and Northern Ireland, bringing the average house price to £209,054. In England the rise was slightly higher at 0.7 per cent and the average house price £224,731, while in London the monthly change was 0.6 per cent and the average house price £470,025. 

However, most regions showed a higher monthly rise than London, including the North West at 2.3 per cent, the West Midlands at 2.2 per cent, the East Midlands and Yorkshire & The Humber both at 1.6 per cent, and the East of England at 1.2 per cent. The South East trailed behind London at 0.3 per cent while falls were seen in the North East at minus 0.9 per cent and the South West at minus 2.8 per cent.

On an annual basis the price change across the UK was 8.2 per cent and in England 9.1 per cent. London saw the highest annual change at 14.5 per cent, followed by the East of England at 13.6 per cent and the South East at 12.3 per cent. The lowest rise was seen in the North East at only 0.1 per cent. Detailed statistics for each local authority area show a wide spectrum of annual changes from minus 4 per cent in Hartlepool to increases of more than 20 per cent in Slough, Thurrock some London boroughs.

By property type, terraced properties saw the greatest annual increase of 9.0 per cent, followed by semi-detached properties at 8.8 per cent, while in terms of sales volumes the annual change from February 2015 to February 2016 was 1.1 per cent. 

New figures are also reported for funding status, which compares average cash and mortgage prices. In England, the average cash price was £210,602 while the average mortgage price was £231,866. For cash purchases, the monthly change was 0.1 per cent and the annual change 8.1 per cent, while for mortgage purchases the monthly change was 1 per cent and the annual change 9.6 per cent. 

New statistics relating to property status showed that the average price of a new build property in England was £275,487, up 4.9 per cent on the preceding month and up 11.2 per cent on a year ago. This contrasts with resold property, which has an average price of £221,315, only 0.4 per cent higher than a month earlier, and 9 per cent higher than a year ago. 

New statistics on buyer status in England showed that the average price of a house sold to a first time buyer was £189,179 with a monthly change of 0.9 per cent and an annual change of 9.3 per cent. However, the average price of a house sold to a former owner occupier was £254,409, showing a monthly change of 0.5 per cent and an annual change of 9 per cent. 

At the end of May, the Office of National Statistics (ONS) announced that their second estimate of the Gross Domestic Product (GDP) for the first quarter of 2016 would remain unrevised at 0.4 per cent. The report showed that the economy was strongly reliant on consumer spending, which increased by 0.7 per cent over the period, while companies had reduced investment owing to uncertainty over the outcome of the EU referendum. A trade deficit had also detracted from the GDP for the third consecutive quarter. The Bank of England revised its growth forecast for the second quarter of the year down to just 0.3 per cent.

Early in June, better news came with the announcement that the trade deficit in April had narrowed after goods exports rose to a near three-year high, while UK manufacturing output in the same month grew at the fastest pace for nearly four years at 2.3 per cent, the biggest monthly rise since July 2012. A significant contribution to manufacturing output was the 8.6 per cent increase in the pharmaceutical industry. The wider measure of industrial output saw an increase of 2 per cent, representing the biggest rise since July 2012.

Between February and April unemployment fell to 1.67 million, cutting the jobless rate to 5 per cent, the lowest since October 2005. At the same time, inflation as measured by the Consumer Prices Index was reported as unchanged in May at 0.3 per cent. The Retail Prices Index, which includes some housing costs, rose to 1.4 per cent in May from 1.3 per cent a month earlier. Following on, the Bank of England’s Monetary Policy Committee monthly meeting on 16th June unanimously agreed to maintain the interest rate at 0.5 per cent and the quantitative easing asset purchase programme at £375 billion.

With respect to housing, figures released by the Department for Communities and Local Government at the end of May showed that housing starts in England had collapsed in the first three months of the year to 35,530, down 9 per cent on a year ago and one of the steepest rates of decline in the last decade. The figure was also 3 per cent down on the previous three-month period. The total starts for the financial year were up by one per cent to 139,680, which is still way below the 250,000 needed according to experts. The Government had set itself a target of one million new homes by the end of its current parliamentary tenure.

The recent announcement of an undercutting fixed rate mortgage package from the Yorkshire Building Society is believed to reflect evidence that first time buyers have benefited from the introduction of higher stamp duty on buy-to-let in April. Estate agents have reported that more than 32,000 first-time transactions were completed in April, the highest monthly total for two years.

The release of the new monthly UK House Price Index, which is now collated by the ONS, showed that over the year to April, prices climbed by an average of 8.2 per cent across the UK and by 14.5 per cent in London, taking the average UK property value to £209,054.

95% loan-to-value mortgages improve

For today’s First Time Buyers, one of the biggest challenges involved in trying to get a foot on that elusive property ladder is raising the deposit. 

With house prices seemingly on the increase all the time, even getting together 5% of a property’s value can equate to thousands of pounds, and securing a 95% mortgage has also traditionally meant having to accept considerably higher rates than borrowers at the other end of the market with plenty of equity.

Recent reports however have shown an almost five-fold increase in the number of deals available up to 95% loan-to-value over the last couple of years, helped in part by the introduction of the Government Help to Buy Mortgage Guarantee scheme in 2013. 

This initiative is due to end this year, but certainly seems to have done its job in terms of reviving what has generally been considered an under-served area of the mortgage market. The range now on offer to borrowers is considerable, and is set to continue whether Help to Buy is extended or not.

Not only are there now more deals available for those with smaller deposits, but interest rates have also reduced over the last few months.  Rates at lower loan-to-values have already hit rock bottom, and as a result lenders have begun to look at the ‘riskier’ end of the spectrum. With more lenders and more deals, comes greater competition, and this can only be welcome news for First Time Buyers.

Of course potential borrowers will still be required to demonstrate that a mortgage is affordable, and pass the necessary credit checks. The Mortgage Market Review has resulted in tougher lending criteria and underwriting procedures across the board, but this in itself has given lenders a greater level of confidence to compete more actively for business.

Saving for a deposit is still a difficult task, but with a greater number of deals and lower interest rates on offer, the boost from Help to Buy has been a noticeable one, leaving the higher LTV market in a much healthier place.

If you are considering a high loan-to-value mortgage and need mortgage advice, then please speak to the Guild Mortgage Service provided by fee free L&C Mortgages.

You can contact L&C mortgages on: 0800 073 1945