Remortgaging crunch looms for buy-to-let landlords

[Byron]

I think that the delay and uncertainty of Brexit is probably causing some Europeans to go home.

This means voids for Landlords

[Ah-so]

9 hours ago, Byron said:

I think that the delay and uncertainty of Brexit is probably causing some Europeans to go home.

This means voids for Landlords

While it might have caused some not to come, doubt many have actually left as a result. 

[TryingToWin]

A mate of mine just got accepted on a new BTL mortgage.

400k house

100k deposit

£450/month IO payments ... 1.79%

£1800/month rental income

... Explain to me at what point this becomes non-profitable without every single OwnerOccupier going down the drain with them?

You need a rate increase of 2-3% on top of what it currently is to come close to breaking these investments :/

That same rate would kill most Owner Occupiers in the country.

[warrior88]

26 minutes ago, TryingToWin said:

A mate of mine just got accepted on a new BTL mortgage.

400k house

100k deposit

£450/month IO payments ... 1.79%

£1800/month rental income

... Explain to me at what point this becomes non-profitable without every single OwnerOccupier going down the drain with them?

You need a rate increase of 2-3% on top of what it currently is to come close to breaking these investments :/

That same rate would kill most Owner Occupiers in the country.

Using this specific example, the answer is the rate.

1.79% is a variable rate (most likely) for 2 years, at the end of 2 year term the rate will switch to either SVR around 6% (+/- 1%) or he will remortgage. The valuation at the remortgage will determine what happens and if he doesn't even break even. 

Scenario 1: House goes down to 350K, he will have to pay SVR (£1500 /month or more) or sell the house. Add to that tax and maintenance, etc. he wont be making any money but losing money.

Scenario 2: House value static or above, his costs (tax bill will increase but thats all)

[Fromage Frais]

11 minutes ago, TryingToWin said:

A mate of mine just got accepted on a new BTL mortgage.

400k house

100k deposit

£450/month IO payments ... 1.79%

£1800/month rental income

... Explain to me at what point this becomes non-profitable without every single OwnerOccupier going down the drain with them?

You need a rate increase of 2-3% on top of what it currently is to come close to breaking these investments :/

That same rate would kill most Owner Occupiers in the country.

OK :-) can you say if he is buying it via a limited company or as an individual? the 5.4% gross is not too bad in an area where people can pay 1800 per month on a property worth 400k.  Am i correct in assuming that this is a flat in the South east?  

Lets assume he has bought it himself in his name and its his only income.

With this being his only income soon ie 2020 he will have to treat the entirety of that income as taxable without the ability of deducting the mortgage payments or a straight line amount for wear and tear.

I have assumed

• 10% management (8-12% norm) fee as his lenders often ask for management.  = £2160
• 5% wear and tear (can no longer just do 10%) = £1080
• 1 months void per year = 1800

Unfortunately you mate must be a man of means as he has £100,000 deposit.

If he got this for from his gran and he earns the average wage it does not look so good lets say £27,000

But the most likely scenario your mate is probably better off than average and if he saved this himself he would be on 30-50,000+ a year.

For 50,000k it looks worse still

I have not included (*)

• purchasing costs
• insurance
• travel to and from the property
• stamp duty
• ground rent and community fees (which may be a lot if the place is leasehold)

This also includes major assumptions for example he can stay on a 2 year fixed discount rate and the rates do not go up.

So he only has the cheap money for another 2 years and then if he cannot find another lender he is on the SVR. Even if he can its all the fees again or a new mortgage.

This is quite a brutal step up as on that pic some go from 1.7% > 4.x% or £450 > £1122.5.

When I apply the cheapest SVR from that list to the middle (average wage scenario)

 

100,000£ for 2468£ return with the risk of 300,000£ debt is not that attractive 2.4%.

Take the other * costs out and you can have almost nothing or be one big bill from loosing money.

 

 

 

[hi5lo5]

Forget about everything else. If your mate is higher rate payer, he will recover the fee he paid for SDLT(22k) in just under 4 years. 

Indeed very sound investment.

If there is a correction in house price and can't meet the lenders requirement for a discounted rate( there won't be many if the TFS ends in Feb 2018) then good luck with a profit if 2k per year it will take 11 years to recover the SDLT.

Edited January 22, 2018 by hi5lo5

[TheCountOfNowhere]

On 20/01/2018 at 5:28 PM, Old Guy said:

A right little charmer

You've not come across the wigs sarcasm before have you  ?

[TheCountOfNowhere]

1 hour ago, TryingToWin said:

A mate of mine just got accepted on a new BTL mortgage.

 

so I went straight on the house price crash forum to tell them

 

[TheCountOfNowhere]

On 20/01/2018 at 6:24 PM, HovelinHove said:

Personally I think there will be blood on the streets if any government bails out the likes of you again. Seeing you and your greedy ***** friends drown in your own vomit would not be good enough

And again....You've not come across the wigs sarcasm before have you  ?

[warrior88]

1 hour ago, Fromage Frais said:

OK :-) can you say if he is buying it via a limited company or as an individual? the 5.4% gross is not too bad in an area where people can pay 1800 per month on a property worth 400k.  Am i correct in assuming that this is a flat in the South east?  

Lets assume he has bought it himself in his name and its his only income.

With this being his only income soon ie 2020 he will have to treat the entirety of that income as taxable without the ability of deducting the mortgage payments or a straight line amount for wear and tear.

I have assumed

• 10% management (8-12% norm) fee as his lenders often ask for management.  = £2160
• 5% wear and tear (can no longer just do 10%) = £1080
• 1 months void per year = 1800

Unfortunately you mate must be a man of means as he has £100,000 deposit.

If he got this for from his gran and he earns the average wage it does not look so good lets say £27,000

But the most likely scenario your mate is probably better off than average and if he saved this himself he would be on 30-50,000+ a year.

For 50,000k it looks worse still

I have not included (*)

• purchasing costs
• insurance
• travel to and from the property
• stamp duty
• ground rent and community fees (which may be a lot if the place is leasehold)

This also includes major assumptions for example he can stay on a 2 year fixed discount rate and the rates do not go up.

So he only has the cheap money for another 2 years and then if he cannot find another lender he is on the SVR. Even if he can its all the fees again or a new mortgage.

This is quite a brutal step up as on that pic some go from 1.7% > 4.x% or £450 > £1122.5.

When I apply the cheapest SVR from that list to the middle (average wage scenario)

 

100,000£ for 2468£ return with the risk of 300,000£ debt is not that attractive 2.4%.

Take the other * costs out and you can have almost nothing or be one big bill from loosing money.

 

 

 

Nicely put!

[crazypabs]

16 hours ago, Ah-so said:

While it might have caused some not to come, doubt many have actually left as a result. 

Where have all the foreign nurses gone then?

https://www.theguardian.com/society/2017/sep/21/almost-10000-eu-health-workers-have-quit-the-nhs-since-brexit-vote

[Saving For a Space Ship]

On 20/01/2018 at 1:34 PM, thewig said:

just bang the rents up?

Smack My Rents Up

[Fromage Frais]

58 minutes ago, crazypabs said:

Where have all the foreign nurses gone then?

https://www.theguardian.com/society/2017/sep/21/almost-10000-eu-health-workers-have-quit-the-nhs-since-brexit-vote

1,400,000 people work in the NHS

12% of that state that they are not British 168,000 

5.6% of the total are EU nationals or 62,000 people

Approximately 1-2% of staff leave the NHS each year which is say 28,000 people leaving.  (seems low to me)

http://www.qualitywatch.org.uk/indicator/staff-turnover-nhs

So even if EU staff had the same job cycle you would expect 1-2000 to leave and since the referendum 2-6000 depending on the reporting period.

You then ask yourself the questions

• are EU staff more likely to move about different countries working?
• Are Eu staff more likely to work in the NHS for a shorter period of time?
• Are Eu staff going to choose another place when the £ has gone down compared to alternative.
  
  You then get to Brexit angle
  
  I have had more EU applicants moan about the £ going down then Brexit

 

[Bland Unsight]

4 hours ago, TryingToWin said:

A mate of mine just got accepted on a new BTL mortgage.

400k house

100k deposit

£450/month IO payments ... 1.79%

£1800/month rental income

... Explain to me at what point this becomes non-profitable without every single OwnerOccupier going down the drain with them?

You need a rate increase of 2-3% on top of what it currently is to come close to breaking these investments :/

That same rate would kill most Owner Occupiers in the country.

The whole of that analysis is predicated on the idea that house prices never go down, whereas back in the real world in London, which has long been a focus of investment by leveraged landlords, house prices are falling right now.

So your (presumably imaginary?) pal puts down £100k on a house, getting a mortgage of £300k.

House prices then fall by 10% over the next two years. He now has debt of £300k and and an investment property worth £360k and is therefore now at a LTV of 83% which means he won't be able to refinance without investing more money.

He needs a mortgage of £270k to be 75% LTV on a £360k house which  means after two years he'll need to find £30,000. The difference between his rental income and mortgage would just cover that if every single penny was income, which it obviously isn't. And obviously what's not to love about an investment where the rental income after expenses just covers the capital losses?

If he can't refinance then the best possible outcome is that lender overlooks the fact he's broached the LTV terms of the mortgage and just bumps him to the SVR, which will be about 5%. His mortgage interest expense goes to £1,250 pcm. Allow 10% of the rent for sundries (fee to the managing agent, voids, repairs, gas certificate, local landlord licensing schemes) and your expenses are at £1,430 and your income per month is £370, so it'll take your income before tax about nine years to cover your capital loss.

Sadly, you have to pay your tax.

If you're a higher rate tax payer (how the hell else do you end up with a loose £100k to bet on houses?) then your taxable income from property is £19,440/year and therefore you tax bill is £7,776. You get an allowance for 20% of your actual interest expense once section 24 is fully phased in (£3,000) so your tax bill is £4,776/year - or £398 a month - totally eating your income and leaving you with a next expense to keep your capital loss company.

You don't need any change in interest rates to make buy-to-let get very ugly very quickly for people at 75% LTV. You just need prices to move against them.

Play in the traffic with leveraged bets on house prices all you want, but don't kid yourself that what you (or your "mate") are doing is anything other than a muppet punt with borrowed money based on the assumption that house prices only ever go up.

None of this is complicated. Be sure to pass on my best wishes to your "mate".

Edited January 22, 2018 by Beary McBearface

[Cosmic Apple]

3 hours ago, Fromage Frais said:

 

What are the product fees on these? They could easily be 2-3k I imaging... every 2 years

[HovelinHove]

2 hours ago, TheCountOfNowhere said:

And again....You've not come across the wigs sarcasm before have you  ?

No. Fell for that one, must admit. Been living in Canada too long, sarcasm and irony are completely lost on Canadians, gave up using it shortly after I got here as they think you are being serious.

[Dyson Fury]

4 hours ago, Fromage Frais said:

 Lets assume he has bought it himself in his name and its his only income.

With this being his only income soon ie 2020 he will have to treat the entirety of that income as taxable without the ability of deducting the mortgage payments or a straight line amount for wear and tear.

 

Thank you for that, you have put a lot of work in  to derive those figures.

But I have to take issue with your spreadsheet entry of "interest now taxable". Nobody is going to be taxed on their mortgage interest outgoings.  That's the fantasy propagated by Ros & her friends.  The issue is the (partial) withdrawal of tax relief on mortgage interest costs.  This, of course, was withdrawn completely for owner-occupiers a generation ago, after being limited to the interest costs on mortgages of only £30,000. 

Your table should have "interest tax-deductible" (the figures other way round from the way you did it) and "taxable income".

Even in 2020, the leveraged BTLers will enjoy a tax credit of 20%.  Why?

Edited January 22, 2018 by Dyson Fury

[Fromage Frais]

7 minutes ago, Dyson Fury said:

Thank you for that, you have put a lot of work in  to derive those figures.

But I have to take issue with your spreadsheet entry of "interest now taxable". Nobody is going to be taxed on their mortgage interest outgoings.  That's the fantasy propagated by Ros & her friends.  The issue is the (partial) withdrawal of tax relief on mortgage interest costs.  This, of course, was withdrawn completely for owner-occupiers a generation ago, after being limited to the interest costs on mortgages of only £30,000. 

Even in 2020, the leveraged BTLers will enjoy a tax credit of 20%.  Why?

It took five mins from a section 24 article. :-)

What it means is the proportion of the interest you can deduct 

 

 

Edited January 22, 2018 by Fromage Frais

[Old Guy]

3 hours ago, TheCountOfNowhere said:

You've not come across the wigs sarcasm before have you  ?

No, but I'm learning.

[Houdini]

1 hour ago, Dyson Fury said:

Thank you for that, you have put a lot of work in  to derive those figures.

But I have to take issue with your spreadsheet entry of "interest now taxable". Nobody is going to be taxed on their mortgage interest outgoings.  That's the fantasy propagated by Ros & her friends.  The issue is the (partial) withdrawal of tax relief on mortgage interest costs.  This, of course, was withdrawn completely for owner-occupiers a generation ago, after being limited to the interest costs on mortgages of only £30,000. 

Your table should have "interest tax-deductible" (the figures other way round from the way you did it) and "taxable income".

Even in 2020, the leveraged BTLers will enjoy a tax credit of 20%.  Why?

Because otherwise it was a 10% taper a year and that could be argued to be too big a tax grab. Furthermore Parliaments cannot bind other Parliaments so it could only be set until 2020. Hopefully in the 2018 or 2019 budget the trend will continue and at some point interest payments on loans will no longer be tax deductible - there are better ways to do this for businesses.....

[spyguy]

7 hours ago, TryingToWin said:

A mate of mine just got accepted on a new BTL mortgage.

400k house

100k deposit

£450/month IO payments ... 1.79%

£1800/month rental income

... Explain to me at what point this becomes non-profitable without every single OwnerOccupier going down the drain with them?

You need a rate increase of 2-3% on top of what it currently is to come close to breaking these investments :/

That same rate would kill most Owner Occupiers in the country.

Io btl is basically a commercial brudging loan. These, when pruced correctly, will cost you 8%+. You pay for the risk.

A 4x household income, 20% down oo mortgage. Thesll cost you 2%ish as its a low risk debt.

The pricing and spread of OO are io btl are not the same.

[Sawitcoming]

7 hours ago, TryingToWin said:

A mate of mine just got accepted on a new BTL mortgage.

400k house

100k deposit

£450/month IO payments ... 1.79%

£1800/month rental income

... Explain to me at what point this becomes non-profitable without every single OwnerOccupier going down the drain with them?

You need a rate increase of 2-3% on top of what it currently is to come close to breaking these investments :/

That same rate would kill most Owner Occupiers in the country.

Surely he cant rent a £400k property for £1800 a month. The last house I rented in SW London was £1840 per month. The house was "valued" at around £650 - £700k. Three bed house. The landlord evicted me and did a lot of renovation on the property thinking he would get an increase in rent. After a two month void refurbishing, he put it back on the market at £1700. Not sure what he got but that seems like a realistic rent for the local area.

Has your friend actually rented it yet or is this just his aspiration?

[Si1]

7 hours ago, TryingToWin said:

A mate of mine just got accepted on a new BTL mortgage.

400k house

100k deposit

£450/month IO payments ... 1.79%

£1800/month rental income

... Explain to me at what point this becomes non-profitable without every single OwnerOccupier going down the drain with them?

You need a rate increase of 2-3% on top of what it currently is to come close to breaking these investments :/

That same rate would kill most Owner Occupiers in the country.

There are so many unknowns here is ludicrous. The small print on your mortgage terms, on your tax returns, on your insurance documents, is not your friend. The market could go against you in several ways, in particular wrt interest rates and house values, not to mention the real losses you'll carry on your OC on your deposit. What makes you think the govt has your back on this? Have you any idea what an emergency interest rate policy is actually for?

Edited January 22, 2018 by Si1

[Ah-so]

5 hours ago, crazypabs said:

Where have all the foreign nurses gone then?

https://www.theguardian.com/society/2017/sep/21/almost-10000-eu-health-workers-have-quit-the-nhs-since-brexit-vote

That figure was a 22% increase in the previous year. Using the exact numbers in the sticker of 9832, this implies that 8059 left the year before. So you are basically saying that 1,772 EU staff left because of Brexit. 

Consider that the pound is much weaker that in June 2016 (admittedly a result of the referendum) then you might almost be surprised that it wasn't a good deal higher given the 20% pay cut they received versus their home currency. 

[Locke]

On 1/20/2018 at 2:04 PM, thewig said:

you realise going from 2%-8% is a fourfold increase

so I hope you can sleep at night wishing for rents to go up fourfold

once again, its the poor tenants who will bear the brunt of this.

 

If coca colas costs suddenly increase fourfold, who do you think picks up the difference? that's right, the customer

Haha, nice.

I'll still point out that housing demand is flexible.

 

On 1/20/2018 at 5:11 PM, macca13 said:

There is a point though where the price is so high the tenant can’t afford it and the landlord can’t rent it.. don’t know what happens at that point..?

[...]

dont know where the homeless tenant goes whilst everything collapses.. 

Although many here contend it, housing demand is very flexible. Everything is interconnected. Housing costs rise in London? Then wages must rise to meet it, and employers do not have any choice in the matter. Either wages rise, or people move away, causing a labour shortage and thus raising wages.

 

Families take up variable amounts of living space. Remember, a hundred years ago, it was usual for a family of 8 to share one bedroom and a living room including kitchen.

Compare this to now, where people are taking up like 15 times the living area in comparison, plus there is a huge amount of vacant stock.

If housing costs rise too much, there is nothing stopping people economising on living area.