Buy To Let Finance Watch

[Jabbabhoy]

Speaking to a friend of mine who rents 2 properties, struggled to fill a room in one of the properties for 3 months had to drop the rent. The other a 1 bed flat had to drop the rent about 8%, on both he had to half deposit.

Was saying how there is a lot more choice now for renters especially with Air BNB changes.

I know for a fact he is just covering the mortgage on the property.

I asked him about tax changes to landlords and had he spoke to his accountant, his response was he will deal with it when it comes and accountant is not bothered about advising unless he is paid, I was like this is probably advise you should pay for.

 

He has no idea how the changes will effect him, he didn't even know about the tax changes until I told him a few months back

 

[Pop321]

11 hours ago, Jabbabhoy said:

Speaking to a friend of mine who rents 2 properties, struggled to fill a room in one of the properties for 3 months had to drop the rent. The other a 1 bed flat had to drop the rent about 8%, on both he had to half deposit.

Was saying how there is a lot more choice now for renters especially with Air BNB changes.

I know for a fact he is just covering the mortgage on the property.

I asked him about tax changes to landlords and had he spoke to his accountant, his response was he will deal with it when it comes and accountant is not bothered about advising unless he is paid, I was like this is probably advise you should pay for.

 

He has no idea how the changes will effect him, he didn't even know about the tax changes until I told him a few months back

 

I hope when you told him about the tax changes you charged him accordingly. At least he could claim the tax on your fee back ?

[Bland Unsight]

Been tracking BTL mortgage rates in a slightly haphazard way for a bit now. The biggest lender in the market remains Lloyds Bank, via its subsidiary BM Solutions.

My personal take is that unincorporated leveraged portfolio landlords will come under irresistible pressure to sell up if section 24 combines with rising BTL mortgage rates.

What remains a little bit mysterious (for me) at present is the impact on lending rates that the new BTL lending regulations are bringing to bear (PRA SS13/16). The graph below is for 'vanilla' rates available to borrowers with three or fewer properties at the relevant LTVs. The stalled for a bit second half of last year but have fallen a little further recently.

The source of the data is the BM Solutions product guide, but obviously only the most recent guide is ever available to on their website. They update the guide every month, but I don't always remember to download it, hence the data above is not complete.

Because it amuses me to wind-up the Poverty Later herberts I focus on them getting blown up by section 24. Because they are morons they sell a fantasy story about "Corporatge big boys" snapping up all the houses when they sell up. In the short-term it looks like rock bottom rates will allow a third possibility.

I generally assume that a great deal of BTLs at purchase are face-washing. The investment covers its costs but generates little if any return when cash costs are measured against rental income. The actual return is expected to come from capital gains.

However, if rents hold-up or increase and mortgage costs fall then profits rise (obviously). What is less obvious is the fact that the leverage means that a drop in mortgage interest from, say, 3.94% to 2.74% as shown in the 75% LTV products above, leads to a non-trivial hike in profits. Long and short of it, circumstances are conspiring presently so that leveraged landlords with two or three properties (and thus access to these cheap mortgage products) will make more profit before tax (because of falling mortgage rates) but their investments will continue to only wash their faces after tax as the impact of section 24 taper in.

[Pop321]

21 minutes ago, Bland Unsight said:

Been tracking BTL mortgage rates in a slightly haphazard way for a bit now. The biggest lender in the market remains Lloyds Bank, via its subsidiary BM Solutions.

My personal take is that unincorporated leveraged portfolio landlords will come under irresistible pressure to sell up if section 24 combines with rising BTL mortgage rates.

What remains a little bit mysterious (for me) at present is the impact on lending rates that the new BTL lending regulations are bringing to bear (PRA SS13/16). The graph below is for 'vanilla' rates available to borrowers with three or fewer properties at the relevant LTVs. The stalled for a bit second half of last year but have fallen a little further recently.

The source of the data is the BM Solutions product guide, but obviously only the most recent guide is ever available to on their website. They update the guide every month, but I don't always remember to download it, hence the data above is not complete.

Because it amuses me to wind-up the Poverty Later herberts I focus on them getting blown up by section 24. Because they are morons they sell a fantasy story about "Corporatge big boys" snapping up all the houses when they sell up. In the short-term it looks like rock bottom rates will allow a third possibility.

I generally assume that a great deal of BTLs at purchase are face-washing. The investment covers its costs but generates little if any return when cash costs are measured against rental income. The actual return is expected to come from capital gains.

However, if rents hold-up or increase and mortgage costs fall then profits rise (obviously). What is less obvious is the fact that the leverage means that a drop in mortgage interest from, say, 3.94% to 2.74% as shown in the 75% LTV products above, leads to a non-trivial hike in profits. Long and short of it, circumstances are conspiring presently so that leveraged landlords with two or three properties (and thus access to these cheap mortgage products) will make more profit before tax (because of falling mortgage rates) but their investments will continue to only wash their faces after tax as the impact of section 24 taper in.

That's good research - thanks. 

For me the rates drop have been an absolute crime. I bought (I know, I know) and the rate was 5.99% as a fixed offer. Or I could go in a tracker. Last minute I pitched for the Lifetime tracker and now pay under 1%. 

I appreciate I am no 118'er, nor do I rely on debt, but it illustrates some of protection built in for more modest 'leveraged numpties'. So much so I still carry the debt despite having cash to repay it and earn more in premium bonds and Santander. Particularly as debt is offset against profit....for the moment ?

Those with 10/50/100 houses are so entwined in the deals that they should be nicely shafted. As are the majority who are using current profits to buy quails eggs and range rovers. And the brighter ones (ie the top 0.005%) will be repaying debt. 

The corporates won't be buying these nasty mixed portfolios - they will want blocks of easy managed 'units'. 

I see the crash coming. S24 is genius from a HPC and anti leverage viewpoint.  With IO at some stage rates will rise and combined with S24 (or for many S24 in its own) will nicely finish the advantages off debt.....and those that rely on debt 

[JimTheHouseCat]

30 minutes ago, Bland Unsight said:

Been tracking BTL mortgage rates in a slightly haphazard way for a bit now. The biggest lender in the market remains Lloyds Bank, via its subsidiary BM Solutions.

My personal take is that unincorporated leveraged portfolio landlords will come under irresistible pressure to sell up if section 24 combines with rising BTL mortgage rates.

What remains a little bit mysterious (for me) at present is the impact on lending rates that the new BTL lending regulations are bringing to bear (PRA SS13/16). The graph below is for 'vanilla' rates available to borrowers with three or fewer properties at the relevant LTVs. The stalled for a bit second half of last year but have fallen a little further recently.

The source of the data is the BM Solutions product guide, but obviously only the most recent guide is ever available to on their website. They update the guide every month, but I don't always remember to download it, hence the data above is not complete.

Because it amuses me to wind-up the Poverty Later herberts I focus on them getting blown up by section 24. Because they are morons they sell a fantasy story about "Corporatge big boys" snapping up all the houses when they sell up. In the short-term it looks like rock bottom rates will allow a third possibility.

I generally assume that a great deal of BTLs at purchase are face-washing. The investment covers its costs but generates little if any return when cash costs are measured against rental income. The actual return is expected to come from capital gains.

However, if rents hold-up or increase and mortgage costs fall then profits rise (obviously). What is less obvious is the fact that the leverage means that a drop in mortgage interest from, say, 3.94% to 2.74% as shown in the 75% LTV products above, leads to a non-trivial hike in profits. Long and short of it, circumstances are conspiring presently so that leveraged landlords with two or three properties (and thus access to these cheap mortgage products) will make more profit before tax (because of falling mortgage rates) but their investments will continue to only wash their faces after tax as the impact of section 24 taper in.

If rents hold (stay the same) and their mortgage interest decreases they will see an increase in their tax of 20% of the amount it decreases by (this is because of the 20% relief still provided by the mortgage interest when the changes are fully complete (used to be 100%)). When you reduce mortgage interest you are also taking away the relief it provides so your tax bill increases.

However they will keep 80% of the amount it decreases by in their pocket as they don't need to service so much interest.

Correct me if wrong, very new to this.

[mat109]

1 hour ago, Bland Unsight said:

Been tracking BTL mortgage rates in a slightly haphazard way for a bit now. The biggest lender in the market remains Lloyds Bank, via its subsidiary BM Solutions.

My personal take is that unincorporated leveraged portfolio landlords will come under irresistible pressure to sell up if section 24 combines with rising BTL mortgage rates.

What remains a little bit mysterious (for me) at present is the impact on lending rates that the new BTL lending regulations are bringing to bear (PRA SS13/16). The graph below is for 'vanilla' rates available to borrowers with three or fewer properties at the relevant LTVs. The stalled for a bit second half of last year but have fallen a little further recently.

The source of the data is the BM Solutions product guide, but obviously only the most recent guide is ever available to on their website. They update the guide every month, but I don't always remember to download it, hence the data above is not complete.

Because it amuses me to wind-up the Poverty Later herberts I focus on them getting blown up by section 24. Because they are morons they sell a fantasy story about "Corporatge big boys" snapping up all the houses when they sell up. In the short-term it looks like rock bottom rates will allow a third possibility.

I generally assume that a great deal of BTLs at purchase are face-washing. The investment covers its costs but generates little if any return when cash costs are measured against rental income. The actual return is expected to come from capital gains.

However, if rents hold-up or increase and mortgage costs fall then profits rise (obviously). What is less obvious is the fact that the leverage means that a drop in mortgage interest from, say, 3.94% to 2.74% as shown in the 75% LTV products above, leads to a non-trivial hike in profits. Long and short of it, circumstances are conspiring presently so that leveraged landlords with two or three properties (and thus access to these cheap mortgage products) will make more profit before tax (because of falling mortgage rates) but their investments will continue to only wash their faces after tax as the impact of section 24 taper in.

Good research - would be interesting to see how this compares with residential mortgages as well, which ( I believe?) continue to fall as well.

[Bland Unsight]

1 hour ago, mat109 said:

Good research - would be interesting to see how this compares with residential mortgages as well, which ( I believe?) continue to fall as well.

Well, this is amusing. I started collecting those rates because the Bank of England did not publish a buy-to-let rate alongside the owner-occupier rates they publish as "Quoted household interest rates" here. 

In the act of scrounging up that link for you I see that they have introduced a new series IUMZID4 and there will be no prizes for guessing that it is the "Monthly interest rate of UK monetary financial institutions (excl. Central Bank) sterling 2 year (75% LTV) buy to let fixed rate mortgage to households (in percent) not seasonally adjusted"

[Bland Unsight]

Here's the BoE data (pretty sure it's a new series, but I've been wrong before).

Edited March 29, 2017 by Bland Unsight

[Bear Hug]

35 minutes ago, Bland Unsight said:

Here's the BoE data (pretty sure it's a new series, but I've been wrong before).

If this trend continues, in 4 years they will be paying BTL landlords to borrow.  

[Bland Unsight]

11 minutes ago, Bear Hug said:

If this trend continues, in 4 years they will be paying BTL landlords to borrow.  

I think that qualifies as cross posting with the thread about the Myra Butterworth Daily Mail article praying for "a new innovative mortgage product", but coupled to a negative interest rate policy where depositors' deposits are gradually written off instead of paying interests, it ought to work just fine. It would certainly help our PovertyLater overlords pay their tax bills. (But does a section 24 relief become a tax charge if the bank are paying you interest on your borrowings? We'll find out soon enough.)

Edited March 29, 2017 by Bland Unsight

[Bear Hug]

7 minutes ago, Bland Unsight said:

I think that qualifies as cross posting with the thread about the Myra Butterworth Daily Mail article praying for "a new innovative mortgage product", but coupled to a negative interest rate policy where depositors' deposits are gradually written off instead of paying interests, it ought to work just fine. It would certainly help our PovertyLater overlords pay their tax bills. (But does a section 24 relief become a tax charge if the bank are paying you interest on your borrowings? We'll find out soon enough.)

I am starting to get it. Rents will generate income tax. It is therefore better for the government to have at least some renters. 

Owner-occupiers just pay mortgage. Renters pay rent to landlord. Landlord pays mortgage from the rent AND income tax on it.  

I had this information before but it just didn't click into place.

[Bland Unsight]

5 minutes ago, Bear Hug said:

I am starting to get it. Rents will generate income tax. It is therefore better for the government to have at least some renters. 

Owner-occupiers just pay mortgage. Renters pay rent to landlord. Landlord pays mortgage from the rent AND income tax on it.  

I had this information before but it just didn't click into place.

I'm not sure that is the plan, because as things stand lots of renters will reach the end of the economic lives without the pension to house themselves (so they'll turn to the state) and they won't accumulate housing wealth which can be cashed in to pay social care costs.

I see 2008 to 2018 buy-to-let as part of an intentional mechanism to help the banks recover, but I don't see how long term a leveraged PRS with rent soaking up 40%+ of household incomes works out for the Treasury.

Essentially buy-to-let (by which I explicitly mean the leveraged PovertyLater muppets and their ilk) is baking problems into the cake and that's why it appears to be being killed off.

[Bland Unsight]

One way to read this is that if the Treasury and Bank of England believed these mortgage rates were going to stay down at these levels, then they'll need to take further steps to discourage BTL. If they do so by saddling investors with further taxes then obviously that will bump the tax take, but I can't see it as long term plan, for the reasons given.

[Patient London FTB]

18 minutes ago, Bland Unsight said:

I'm not sure that is the plan, because as things stand lots of renters will reach the end of the economic lives without the pension to house themselves (so they'll turn to the state) and they won't accumulate housing wealth which can be cashed in to pay social care costs.

I see 2008 to 2018 buy-to-let as part of an intentional mechanism to help the banks recover, but I don't see how long term a leveraged PRS with rent soaking up 40%+ of household incomes works out for the Treasury.

Essentially buy-to-let (by which I explicitly mean the leveraged PovertyLater muppets and their ilk) is baking problems into the cake and that's why it appears to be being killed off.

You say that, but I'm becoming more interested in the possibility that the way housing is taxed reaches a crisis point in the next few years. They're putting a big burden on stamp duty, which people interpret as a tax on moving (even if it was abolished it would just feed back into house prices), but the tax system is doing little to restrain over-consumption of property by the super-rich and nudge pensioners into downsizing. Among the many reasons for section 24 is clearly an attempt to tackle the tax avoidance enabled by taking out large IO debt, but I'm wondering how much tax is going to come from incorporated landlords and the build-to-rent sector in future? 

[Bear Hug]

23 minutes ago, Bland Unsight said:

One way to read this is that if the Treasury and Bank of England believed these mortgage rates were going to stay down at these levels, then they'll need to take further steps to discourage BTL. If they do so by saddling investors with further taxes then obviously that will bump the tax take, but I can't see it as long term plan, for the reasons given.

While I doubt there is any true long term planning going on (we wouldn't be here if there was), I am certainly happier with the current situation compared to where we were 2-3 years ago.

[Tapori]

7 hours ago, Bland Unsight said:

I'm not sure that is the plan, because as things stand lots of renters will reach the end of the economic lives without the pension to house themselves (so they'll turn to the state) and they won't accumulate housing wealth which can be cashed in to pay social care costs.

I see 2008 to 2018 buy-to-let as part of an intentional mechanism to help the banks recover, but I don't see how long term a leveraged PRS with rent soaking up 40%+ of household incomes works out for the Treasury.

Essentially buy-to-let (by which I explicitly mean the leveraged PovertyLater muppets and their ilk) is baking problems into the cake and that's why it appears to be being killed off.

"You've pissed on the biscuit BTLers.

I will not eat the Pissy Biscuit"

The Thick of It - Scene Re-imagined.

[Bland Unsight]

I've given some thought to the portfolio underwriting rules that will come in after 30 September 2017.

So far, the lending industry have been pretty much silent in terms of what they've communicated to those of us in the cheap seats.

The rules are potentially a big deal because:

• they require lenders to look at the landlord's entire portfolio if the landlord has four or more properties
• they require the lender to look at the impact of section 24
• they require lending to be 'stress tested' at a rate of 5.5%

The thoughts that follow are based on mucking around with this spreadsheet (you can change the items in the green cells on the first sheet). The spreadsheet considers a single landlord with no non-property income.

I'm predominantly interested in the fate of the BTL Masters of the Universe, the twenty-thousand or so investors with about 25 properties (on average) the existence of which is suggested by analysis of the Scanlon/Whitehead December 2016 CML report. For investors of this type ownership of the portfolio by a couple doesn't have much of an impact because the size of the income wipes out personal allowance (or almost all of it, even for a couple).

Long and short of it, if a big portfolio (25-ish) is geared anywhere north of about 55%, then if all of it was on 5.5% mortgage rates it can't wash its face post-s24 on the yields that prevail in London and the South East.

The only way to fix this is to lift the yields or reduce the LTV.

I'd be interested to hear what the regulators from the Bank of England reviewing the credit underwriting would say if the lender's employees said, "We know yields in the area are only 4.5% and this borrower is only achieving yields of 4.5% but they've told us that they are going to jack up their rents and achieve 5.5% across their whole portfolio". I'm not sure that accepting the landlord's say-so would constitute sound underwriting. In light of this, I'm inclined to set aside the idea of landlords being able to fix the yields - or to speak more precisely, I don't think the bank will be able to assume that the landlord can crank up yields and then loan the money on the basis of the planned rent rises across the whole portfolio.

Now the other fix is reducing the LTV.

These portfolios are big. If you've got 20 properties worth even only £150k a piece that's still £3m in total. To adjust the LTV on the whole portfolio by 5% you need £150,000 of good cold cash.

As we've previously discussed selling doesn't release lots of cash. The mortgage needs to be paid off, capital gains crystallise. To free up enough money to reduce the LTV you may need to materially shrink the portfolio. With high-leverage and large unrealised gains you may need to practically sell the lot.

I can't see how underwriters can sign-off on the basis of a promise from a landlord to sell other properties in the future.

In light of this I'm really intrigued as to how the lenders will respond.

It's a rather delightful Catch-22.

The lenders have to assess at the stress rate, but if the LTV of the portfolio is too high then at the stress rate the portfolio fails, so they can't lend, so then the mortgages revert to the SVR, which is basically the same as the stress rate, so the portfolio fails.

I see that James Fraser is on facebook saying that "some idiots" on the internet keep telling him to sell up and evict his tenants. That's missing the point. I've argued that section 24 is going to make them sell up, but I was wrong about that - the problem is going to be section 24 or PRA SS13/16 working in tandem. If these leveraged portfolio guys are really the smartest people in the room then they ought to soberly reflect on their chances of overturning either section 24 and PRA 13/16. You can tell the world how unfair you think it is, but that changes nothing. You can delay your acceptance, but that won't stop what's coming.

It ain't all waiting on you, Jamie. That's vanity.

 

Edited April 11, 2017 by Bland Unsight

[Patient London FTB]

7 minutes ago, Bland Unsight said:

I've given some thought to the portfolio underwriting rules that will come in after 30 September 2017.

Accepting the premise of your post (can't see any reason not to), what does this mean for the timing of when the portfolio is deemed to have blown up? 

Say the portfolio LL's first mortgage deal to need refinancing is with Shite Bank in January 2018 and his second is with Toss Building Society in April 2018, does Shite Bank get first dibs at going through the books and therefore the first chance to repossess? 

[spyguy]

19 minutes ago, Patient London FTB said:

Accepting the premise of your post (can't see any reason not to), what does this mean for the timing of when the portfolio is deemed to have blown up? 

Say the portfolio LL's first mortgage deal to need refinancing is with Shite Bank in January 2018 and his second is with Toss Building Society in April 2018, does Shite Bank get first dibs at going through the books and therefore the first chance to repossess? 

First to repo is normslly first to get hands on other assets.

[JDI]

They won't repossessed just because the current mortgage deal expires.  It'll go to SVR, and only be repossessed if the owner defaults.

Surely any landlord with 20 properties has viable options before repossession?

[Bland Unsight]

27 minutes ago, Patient London FTB said:

Accepting the premise of your post (can't see any reason not to), what does this mean for the timing of when the portfolio is deemed to have blown up? 

Say the portfolio LL's first mortgage deal to need refinancing is with Shite Bank in January 2018 and his second is with Toss Building Society in April 2018, does Shite Bank get first dibs at going through the books and therefore the first chance to repossess? 

I don't think the portfolios will blow-up quite like that. What I meant was that the underwriters will be forced to acknowledge that it will be booking losses April 2020 if it was financed at 5.5%, and therefore they won't be able to lend against it; existing loans will still be able to roll onto the SVR, but no super cheap 2-year fix rates.

My guess is death by a thousand cuts.

When it they seek to refinance a property onto a competitive rate they'll find that they won't be able to and that particular mortgage will get bumped to the SVR. At the SVR that property won't wash its face by 2020, so that particularly property will go on the market at some point between when the refinancing was blocked and April 2020.

A lot of the 4+ investors will be in pretty much the same pickle as the 20+ guys, so about 800,000 properties in the mix.

Game on.

Usual caveat about a possible interaction between falling prices, LTV clauses and Basel III making underwater BTL loans about as popular as cancer of the @rse cancer (which is even less popular than @rse cancer) with the banks and prompting a more exciting fire-sale based on LTV margin calls.

[Bland Unsight]

4 minutes ago, Just_Do_It said:

They won't repossessed just because the current mortgage deal expires.  It'll go to SVR, and only be repossessed if the owner defaults.

Surely any landlord with 20 properties has viable options before repossession?

Agreed, repossession is not part of how this works.

[Exiled Canadian]

Prof Unsight - just to check I'm interpreting your spreadsheet correctly.  If I amass a "Master of the Universe" portfolio of 20 "compact but bijou" properties is it right that your assessment of my annual post tax income on this fine portfolio is less that £20k pa? - even if I've fronted half the cash myself?

It makes me wonder what the point of dealing with all of the underpants and curry odours is?

[Bland Unsight]

1 minute ago, Exiled Canadian said:

Prof Unsight - just to check I'm interpreting your spreadsheet correctly.  If I amass a "Master of the Universe" portfolio of 20 "compact but bijou" properties is it right that your assessment of my annual post tax income on this fine portfolio is less that £20k pa? - even if I've fronted half the cash myself?

It makes me wonder what the point of dealing with all of the underpants and curry odours is?

The key is to ensure your present equity is all earlier capital gains. If you can't get yourself a time-machine and do that the central appeal is limited to shitty pants.

[Neverwhere]

1 hour ago, Bland Unsight said:

When it they seek to refinance a property onto a competitive rate they'll find that they won't be able to and that particular mortgage will get bumped to the SVR. At the SVR that property won't wash its face by 2020, so that particularly property will go on the market at some point between when the refinancing was blocked and April 2020.

I wonder how this will interact with prior MEW'd portfolio expansion?

As with Busta's, some of those properties may lack the equity to pay the CGT which would arise on their sale - and there's no reason to think that they would necessarily come up for refinancing in the order most helpful to the BTL landlord, i.e. with lowest CGT liability first and highest CGT liability last - so the sale of one property might conceivably necessitate the sale of other properties in the portfolio, until the equity of the properties sold balanced all of the costs of selling them, or the overall LTV of the portfolio was low enough to allow for more favourable refinancing.

Hypothetically that should mean that the more precariously positioned BTLers have to unwind their positions a bit more quickly than might otherwise be suggested, but it could mean that some of them try to swallow early losses until complete collapse is forced upon them.

1 hour ago, Bland Unsight said:

A lot of the 4+ investors will be in pretty much the same pickle as the 20+ guys, so about 800,000 properties in the mix.

Game on.

Usual caveat about a possible interaction between falling prices, LTV clauses and Basel III making underwater BTL loans about as popular as cancer of the @rse cancer (which is even less popular than @rse cancer) with the banks and prompting a more exciting fire-sale based on LTV margin calls.

Game on.

Edited April 10, 2017 by Neverwhere