What are the challenges ahead in the buy-to-let market?
Fox Davidson reveals the challenges ahead for buy to let but says rates will remain low in its Housing & Mortgage report, Quarter 3 2016.
The Council of Mortgage Lenders reported that gross lending was £20.5bn in September, a fall of 7 per cent from the £22.5bn seen in August but 2 per cent higher than the £20.1bn lent in September last year.
Lending for the third quarter of 2016 was estimated at £63.6bn, 11 per cent higher than the second quarter of this year, and 4 per cent higher than the third quarter of 2015.
The Prudential Regulation Authority changes have made it harder to borrow using buy to let mortgages. Rent to loan calculations have changed resulting in lower loan amounts being achievable.
On the up-side, lenders that are not regulated by the FCA will not be affected by the PRA rules and consequently we expect a wave of new lenders to jostle for the top 5 spots of the buy to let lending table. Lenders such as Precise Mortgages, Pepper and Axis Bank will become the norm, especially if you are buying in the name of a Ltd company.
The consensus from property experts is that the market is cooling in varying degrees across the different areas of the UK. The main factor keeping property prices up is the lack of stock.
Hometrack released its August report. Bristol (13.1%) tops the annual property price index with London (10.4%) in second place. In the latest quarter Liverpool tops the table.
The report comments ‘The 20 city index recorded its lowest level of quarterly growth (1.9%) for 6 months as a seasonal lull in market activity and weaker demand post Brexit and the March Stamp Duty change reduce the upward momentum of house price growth.’
Fox Davidson have highlighted the possibility of a mass exit of buy to let properties in the coming years due to tax changes. We have seen a noticeable amount of clients taking out 2 year fixed rates with the view that want to sell without being tied into a mortgage penalty once the new tax rules take hold from 2017 onwards.
This new supply of property could bring down property prices which would be welcome news for anyone in the market to purchase a property during the next few years. This needs attention from policy makers.
At the start of October Fox Davidson met with a representative of The Bank of England and had a round table discussion. We looked at what’s next for interest rates. Key points from that meeting:
- Bank of England base rate is at a record low
- Bank base rate more likely to fall than increase at present
- Inflation is slowly increasing but rates are not expected to increase to combat inflation as other factors such as employment levels will override curbing inflation
- Rates to stay low, good for borrowers, bad for savers.
- Foreign investment will balance the UK current account due to the low pound, keeping economy growing
- GDP like to be at 0.3% for Q3 2016, normal growth is 0.6%
Fox Davidson expect rates to remain at 0.25% for most of next year with rates slowly increasing from the end of 2017 up to 2% by 2018. It doesn’t make sense to forecast beyond 2 years.
Bank meetings to set rates have now switched from every 4 weeks to every 8 weeks.
The Cost of Borrowing
Personal & Business interest rates for borrowing remain at all-time lows, lenders still competing for business using rate and low set up costs including cash back and free valuations. This is good news or anyone taking out a mortgage in their own name or for their business.
Swap rates now increasing so we may have seen the low point for long term fixes of 5 years or more.
There are some challenges ahead with regards to changes to buy to let but property remains a sound investment returning high rates of capital growth and in the event of a buy to let, an income too. This will ensure buy to let remains attractive. The way property is held and who funds it will be the major change.
Demand will continue to outstrip supply of property. Estimates are that 225,000 properties need to be built each year and we are building around 135,000.
Rates will remain low for a long time and anyone re-mortgaging now coming out of 3 or 5 year fixed rates will be pleasantly surprised.