Collapse of the Buy to Let market in London
I don't usually like to write negative posts, especially in my own sector and especially in January, but as I sit here pondering about the future I am extremely worried the regulators have pushed the banks too far and the buy to let market will soon be non-existent in London.
Well at least for anybody with less than a 50% deposit. The biggest problem here is when current borrowers are looking to re-finance, but then realise they do not fit current criteria and are either forced to stay on the banks follow on rate or the bank they are with does not give them the opportunity to switch to the best rates the bank offers for new clients. This then creating a huge detrimental effect in there interest rate in some occasions more than doubling the rate, with the customer not being able to do anything about it.
Over the last 18 months I have seen the rules around buy to let lending get tighter and tighter and tighter. I understand the issue as the FCA is worried that the buy to let market is over exposed to an increase in interest rates. Then pair this with the new government tax rules and it seems they have been working together to eradicate the property investor business and buy to let market altogether. Lets take a live example - Our average house price in across our portfolio of clients is £692,000 and 75% of this is £519,000.
So 18 months ago you would be able to get a mortgage at a stress rate of 5% of 125%.
This means you £519,000 / 100 x 5 = £25,950 .
Then £25,950 x 125% = £32,437. For this mortgage to work the rental return would have to equal £32,437 per annum, which is quite reasonable for a property valued at £692,000 within the M25. Now if I source todays cheapest mortgage the stress affordability calculation is 5.5% of a 145%. So lets do the same calculation.
£519,000 / 100 x 5.5 = £28,545
Then £28,545 x 145% = £41,390. So the same property needs an extra £8,953 in rent per annum to make the same mortgage work today.
This is going to cause two extremely huge problems in the next couple of years. First of all land lords will increase rents massively to try and obtain the best deals. Secondly a lot of customers will be stuck on interest rates which are way too high compared to the base rate and will not be able to remortgage elsewhere because they no longer fit criteria costing them an absolute fortune. I had written an article on this back in May but it seems to have got worse. (see link below)
If we now look at what happens to the tax bill of the example above. Lets assume the client has an income of £60,000 (quite common in London), with an additional property at 75% loan to value with a mortgage of £519,000 and a rental income of £2,700. The client's mortgage finishes in 16-17 tax year and due to the changes has to stay on lenders standard variable of 4% as current lender does not offer a rate switch service. Over the next 5 years the interest tax relief will deduct and come 2020/2021 tax year this client will be liable for an £8,800 tax bill as opposed to a £4,656 tax bill as of 16/17 tax year.
The regulators will have to step in very soon I believe to not only protect the current customers. Possibly enforcing the banks to have lenience on remortgage buy to let customers when trying to secure new deals or offer rate switch to their current market products (some lenders have done this but not all). This may be the only way to reduce the problem that is about to happen in the next couple of years.
As always would love to hear thoughts of people in the industry and if you are a current buy to let mortgage holder then feel free to get in touch with any questions.
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