The word to sum up these last three months is 'uncertainty'

With the first quarter of 2019 now over, we can safely say that the word to sum up these three months is uncertainty. Already we’ve seen three lenders stop lending or pull all of their products due to ‘costs of funding’ and ‘uncertain times ahead’.  This is all a bit ‘de ja vu’ compared to back in 2007/8 before the big ‘crash’.  However, this time we’re not on the verge of a global recession (hopefully) and once we know what lies ahead for Brexit, things should return to some normality, whatever that may be. 

Lenders usually want to start the new financial year with a flurry and so as expected we have seen a number of lenders launch limited edition products. These are short term offers and therefore if you are looking to secure your ‘uncertainty’ for the next three to five years, there are some great deals to be had currently.

It always surprises me how few people actually know what rate they are on, the type of mortgage, i.e., fixed rate, tracker rate, etc, and whether they are paying interest only, or capital repayment. Unsurprisingly, almost everyone knows what it costs per month to the nearest penny!  They will haggle for a £10 discount on a new washing machine or sky TV, whilst letting ‘sleeping dogs lay’ when it comes to the mortgage!

It’s very easy when the promotional rate period comes to an end to keep your mortgage with the same lender, ‘brush it under the carpet’, and deal with it ‘tomorrow’.  But we all know tomorrow never comes.  A review of what’s on offer from other lenders, especially if you’re currently on a Standard Variable Rate, or equivalent is wise. These types of rates tend to be a lot higher than what’s available in the market place.

Many lenders are offering superb remortgage opportunities with minimal costs to change, including free standard valuations and some with legal costs.  Rates are competitively low and mortgage product choice is at its highest for some time.

If there’s ever a time to review all options and give yourself a piece of certainty, now might be a good time, as after Brexit, who knows where we will be..

Confusion regarding Buy to Lets and how lenders look at affordability.

Last weekend, we exhibited at the Property Investor and Homebuyers show at the London ExCel.  It was a great opportunity to talk to professional landlords, as well as those looking to take their first steps onto the Buy to Let sector ladder. 

With many changes and increases in taxation on profits being recently introduced along with licence requirements for houses of multiple occupation, minimum size requirements on rooms, etc, the Buy to Let sector has taken quite a beating!  Yet with interest rates so low and demand for rented properties increasing, and no clearly defined solution to help first time buyers, I can't see these changes killing off the sector just yet!

In fact, the exhibition showed how many people were genuinely interested in looking at renting out property as a long-term investment and project.  Including a number of first time buyers looking to buy a property to rent, rather than to live in. 

However, there’s a lot of confusion still regarding Buy to Lets and how lenders look at affordability.

So, to try and clarify - Since the Prudential Regulation Authority stress test rules came in to effect in 2017, lenders have to work out affordability based on the rental income achievable from the property and stress the product term over a five year period, often at 145% of a nominal rate of 5.5%.

Lenders interpret the rules differently and differentiate between a Buy to Let in a personal name compared to a property brought in a limited company name.

  

However, if the lender offers a fixed rate over a five year period, the actual pay rate can often be used, instead of the nominal rate of 5.5%.

Therefore, by way of example - A standard buy to let in a personal name, achieving a rent of £950 per month, with the calculations of 145% of 5.5%, would equate to a loan of £142,947

If we used the same example, but in a limited company name, and on a five-year fixed rate, the changes in loan achievable become very apparent: 

125% of 3.49% (Limited Co & 5 year fixed) - a rent of £950 pm = £261,318

Please note that these are examples only and every case is looked at and underwritten on its own merits

With all of the recent tax changes on Buy to Lets, you should now seek professional mortgage advice, along with in-depth tax advice from an accountant who understands property, limited companies and all the new rules surrounding landlords and, where applicable, portfolio landlords.

Self Employed? Not a problem..

A large myth suggests that because you are self employed, you will find it harder to get a mortgage. 

Maybe that was so a few years ago, but not today. 

Yes, the financial crash took its toll on the self employed and quite rightly killed off the ‘self certification’ type deals (no proof of income).  But today lenders are quite happy to lend to those who are self employed and have a good track record.  The majority of lenders require two years accounts and will tend to average your last two years figures.  However, there are also some lenders who will look to assist you even if you are in your first year.  Some will also consider just last year’s figures, even if you have been self employed for longer.

Generally, the longer you’ve been self employed and the more years accounts you have, the larger number of lenders you will have who are willing to assist.

Some lenders do not require to see your full accounts, but will require an accountants certificate to be completed.  This differs lender to lender. Some will require a full set of accounts and/or an accountants certificate! Some will require this and/or SA302s, tax year overviews and more.  All can be requested via HMRC. 

They may also require to review business bank statements to review day to day cashflows and possible projections for future income, including potential contracts, etc.

This can also change depending on the make up of your self employment, whether a sole trader, partnership, Ltd company director and so on.

Deposit requirements can range lender to lender, but the bigger deposit you have, the greater the number of deals will be available to you.

Finally, plan ahead.  Six months ahead of your mortgage requirements, make sure you have your house in order.  Check your bank statements are in good order, check you have the right accounts and relevant paperwork from your accountant.  Don’t have too many credit searches in a short amount of time as this could affect your credit score.  Ensure you are on the electoral role and have decent breathing space on card limits and loans.  All of this should put you in a good position before the lender even looks at their ability to lend to you! 

What is mortgage affordability?

One of the most frequent questions to start a mortgage interview tends to be around ‘How much can I borrow?’.   Only a few years ago, that could easily have been up to 8 x income with the minimal of fuss.  Oh, how things have changed, and rightly so!  Those were times with little control and the lengthy recession bore testament!

Today it is so much more intense!  For example, a lender will require to know your monthly budget spend figures, right down to every direct debit on your bank statements, including council tax, insurances, mobile phones, lottery payments and gym membership!  From these monthly outgoings, the lender will look at affordability and decide from there what mortgage amount might be available to you.  However, on the other side, not only can it be restrictive depending on your monthly outgoings, but it can also be very generous depending on what little outgoings you have!   The lender has a duty to make sure you can afford your mortgage today, as well as when rates rise and specifically to it being considered affordable over a 5 year period.

But this also means that what was once an affordable mortgage may suddenly become unaffordable due to the perception the lender has on consumer spending habits, both historically and projected for the future.  

We have seen the phasing out of income multiples and the introduction of affordability models.   So, no more straight forward 4 or 5 x income discussions.  The amount you can borrow will depend on your monthly net income against expenditure and living costs.  However, this also works positively for the right loan to value, right affordability and right customer, as lenders are willing to offer a little bit more. 

With the increase in requirements, the time taken in research prior to recommendation for a suitable mortgage product has also increased, as have the lenders own underwriting procedures.  So, beware if you are in a rush!