Buy to Let Mortgages 2017 Vincent Burch, Sole Director - Vincent - PowerPoint PPT Presentation

Buy to Let Mortgages 2017 Vincent Burch, Sole Director - Vincent Burch Ltd Jason Wilde, Regional Sales Manager - Paragon Bank

Paragon Major Lender for Complex BTL Main BTL changes in 2017: Jason Wilde from Paragon Bank  Tax changes, case studies  PRA restrictions on lending,  Changes in the banks lending trends  Landlord opportunities Vincent Burch – Mortgage Broker, Norwich  Alternative Finance  PRA Summary  Qualified Advice

Choose a title page from the options Opportunities in the Private Rental Regional Sales Managers

Placeholders Agenda • What changes have we seen recently? o Minimum affordability standards o Specialist underwriting for portfolio landlords • Landlord strategies o Rent increases o Maximising attractiveness of your property o Houses in multiple occupation (HMOs) o Limited company • Questions Adapt and thrive 4

Placeholders What changes have we seen recently?

How do changes to tax relief impact landlords? Placeholders Intended result Unexpected result Unexpected result Victoria Sarah Ian Basic rate tax payer Higher rate tax payer Higher rate tax payer Moved into higher rate tax Moved into additional rate tax Tax relief almost halved Child benefit clawed back Personal allowance withdrawn Victoria earns £55,000 income from Sarah earns £40,000 income from other Ian earns £45,000 income from other sources. sources. She has two children and other sources. receives child benefit of £1,823. Victoria has two buy-to-let properties, He has a large property portfolio, generating rent - net of costs before Sarah has two buy-to-let properties, generating rent - net of costs before interest - of £15,000. generating rent - net of costs before interest - of £200,000. interest - of £20,000. Ian’s buy -to-let properties are worth Victoria bought her buy-to-let properties for £275,000, using cash and buy-to-let Sarah bought her buy-to-let properties £4.6m million and are financed by £3.8 loans for £360,000, using cash and buy-to-let million of £200,000. The interest rate on her loans of buy-to-let loans at an interest rate of loans is 4.5% resulting in annual interest of £310,000. The interest rate on her 4.75%, resulting in an annual interest of £9,000. loans is 4.5%, resulting in annual interest bill of £180,000. of £14,000. Tax on property income Tax on property income Tax on property income Current - £2,400 Current - £1,923 Current - £8,000 Proposed - £4,200 Proposed - £6,546 Proposed - £52,990 6

Placeholders Specialist underwriting for portfolio landlords • Second stage of PRA changes to be applied from 30 September 2017 • Portfolio landlords are defined as a professional landlord who has four or more mortgaged buy-to-let properties • Lenders are expected to apply a specialist underwriting process in these cases, including requests for: Accounts or tax returns / tax overviews / SA302’s. o o Business plan o Cash flow forecast o Bank statements • We will continue to see a polarisation in the market - mainstream lenders against specialist lenders Adapt and thrive 7

Placeholders Outcomes • We have seen a big increase in five year business • Gross rentals seemed to come as a surprise to many brokers • Less ‘vanilla lending’, significantly more specialist lending • Landlords looking for ways to maximise yields • Shift in focus to Northern Towns/Cities. Adapt and thrive 8

Placeholders Landlord strategies

Placeholders Rent increases 80 Tenant demand 60 40 • Landlords continue to report 20 strong tenant demand for PRS 0 property Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 11 11 11 11 12 12 12 12 13 13 13 13 14 14 14 14 15 15 15 15 16 16 16 16 • Market underpinned by population % of landlords saying demand is Increasing growth, limited house building % of landlords saying demand is stable and mortgage affordability % of landlords saying demand has decreased constraints Index of Private Housing Rental Prices: Rental growth % change over 12 months • 4 Rent increases usually follow inflation 3 2 • Required increase over the next four % 1 0 years to mitigate policy changes -1 outstrips inflation -2 Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11 Jun-12 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 • Opportunity for sustained above inflation increases untested England England excl London Adapt and thrive 10

Rent increases – worked example Placeholders Scenario: • Higher rate tax payer • £600pcm rent, loan amount £150,000 • Interest 3.5% (with an assumption that mortgage interest will not increase) Current 2017 / 2018 2018 / 2019 2019 / 2020 2020 / 2021 £600 £600 £600 £600 £600 Rent Net Profit £1,170 £908 £645 £383 £120 What would you have to increase your rent to in order to maintain your net profit? Rent £600 £637 £673 £709 £746 Net Profit £1,170 £1,170 £1,171 £1,167 £1,171 Adapt and thrive 11

Placeholders Maximising attractiveness of your property • Keeping your property in tip top order to maximise rental income • Value your existing tenants • Letting the property quickly means less void periods • Select the right location what is your driver - yield or capital appreciation? Adapt and thrive 12

Placeholders Houses in multiple occupation Configuration 1: Configuration 2: 3 bedroom terrace 3 bedroom terrace Rented to one family at £600pcm Rented to four sharers at £75ppw / Avg £1,125pcm Higher rate tax payer Higher rate tax payer Loan amount £150,000, interest 3.5% Loan amount £150,000, interest 4% Full occupancy 45 weeks occupancy Rent (£600) Rent (£1,125) Net Profit £1,170 Net Profit £4,500 2017 / 2018 £908 2017 / 2018 £4,200 2018 / 2019 £645 2018 / 2019 £3,900 2019 / 2020 £383 2019 / 2020 £3,600 2020 / 2021 £120 2020 / 2021 £3,300 Adapt and thrive 13

Placeholders Incorporation • A lot of people are talking about it but not as many are taking the plunge • The broker’s job is to provide information about all of the options available and to encourage the customer to seek the right professional accountancy advice • Ltd Company lending isn’t suitable for every Landlord Adapt and thrive 14

Re-mortgaging within six months Placeholders Before… 15

Re-mortgaging within 6 month Placeholders Purchase price: £177,000 After Renovation cost: £15,000 Post works valuation: £250,000 80% re-mortgage with Mortgage Trust: £200,000 Timescale: Two Months 16

Short-Term Finance / Bridging Finance ‘ Subject to status’ and ‘individual application assessment’, etc. ‘No Advice Given’ and ‘Illustration only’ plus legal & Val fees, Bridging Finance Paragon do not do Bridging Finance (currently)  Bridging Finance rates typically start from monthly fee  Light; 0.55% to 50% LTV or 0.75% for 75% LTV – 1.95% fee  Structural; 0.75% to 65% LTV or 0.83% to 75% LTV – 1.95% fee  No Experience; 0.94% to 75% LTV – 2% fee

Exit Finance – BTL Mortgage ‘ Subject to status’ and ‘individual application assessment’, etc. ‘No Advice Given’ and ‘Illustration only’ plus legal & Val fees, Mortgage Rates – 75% LTV Remo & Open Market Value (OMV)  Within 6 months  Own Name – 1.95% with 1% fee, 2 yr fix  Ltd Company – 3.55% with £995 fee, 3 yr fix  HMO  3.6% with £1,495 fee = using “Rental Value” 3 yrs fix  4.59% with 1.25% fee, 5 yr LIBOR Tracker  After 6 months  Own Name – 1.98% with £995 fee 2 yr fix  Ltd Company – 3.19% with 1.5% fee, 2 yr fix  HMO  3.6% with £1,495 fee = using “Rental Value” 3 yrs fix  2.09% with £995 fee (maximum 5 bedrooms), 2 yr fixed

Some things you might not know about Paragon  Day 1, Remortgages  Up to 85 years of age - youngest borrower  Lend up to 80% Loan to Value  No HMO experience required, 1 years minimum landlord experience  Allow more than one lender on a Ltd Company  Can change existing Paragon Mortgages in own name to Ltd Company, for an admin fee  £10m lending (although I’ve done a little bit more)

PRA Regulation, Broker Summary Restriction of lending Other points  Portfolio Landlord, more than 3  Responsible loan based on rent  September new rules  125% of 5% - £600 = £115,200  Before 2017  Top slicing rental from income  145% of 5.5% - £600 = £93,506  Lenders not regulated by PRA  Mostly used in own name  BOE cannot forecast 5 years  125% of 5.5% - £600 = £104,727  No mortgage prisoners  Mostly used in Ltd Company  £ for £ refinance  125% of 4% - £600 = £144,000  Regulated (Consumer) Buy to  5 year fixed rate, with Paragon Let? Paragon don’t - MT do