The prospect of an interest rate rise has prompted many homeowners and Landlords to lock into more competitive mortgage deals, as the British Bankers’ Association report remortgaging rose nearly 29% in July. So what should you do? We ask local mortgage advisor, Ben Adams of CBK Wales his opinon on the current situation. 

Issues in the residential market affecting the Buy-to-Let sector:

April 2014 saw the introduction of the long awaited Mortgage Market Review, which lenders had by in large adhered to for some time.  Where we had seen lenders becoming slightly more flexible and understanding throughout 2013 into 2014 – MMR seemed to tighten criteria and affordability once again. On top of this the Bank of England has introduced an income cap on the majority of loans to no more than 4.5 times a borrower’s income. Both these measures have impacted first time buyers and home movers alike. The income cap particularly affects single people and low income earners.

Deposits have always been an issue for first time buyers, whilst we have a range of 95% LTV products, with and without Government backing, until recently the rates have been unattractive and therefore further impacting affordability. Saving post-recession has been difficult with the cost of living was running high, although this seems to have eased over the last 18 months as inflation is now running close to 0% and wages are reportedly on the rise.

Each year sees more and more lenders (re)entering the market place and few are hitting their lending targets, coupled with quantitative easing, low base rate, tight margins = the most competitive rates possible, particularly for those with 10% or more deposit. This is welcome news for good savers wanting to buy, those who can get a helping hand from their family & home movers with equity (if they can sell, usually to first time buyers).

The tightened criteria and lack of deposit has pushed many more would be first time buyers into the rental market. Rent and demand remains increasingly strong, providing income opportunities for seasoned and ‘accidental’ landlords who have been unable to sell their homes.

Buy to Let:

The Let-to-Buy market, for those unable or unwilling to sell their current home, is booming. Fuelled by very competitive rates for BTL mortgages at 75% loan to value and under – with the lowest interest rates we’ve ever seen and very reasonable rates available on limited 80% LTV products.

Whilst all seems rosy in the Buy to Let market, George Osborne has other ideas – raising taxes, with landlords one of the victims of the budget. ‘Wear & Tear’ on furnished properties is being replaced next April with ‘Tax Relief for Replacing Furnishings’, which is currently undergoing consultation – more to follow. Higher rate tax paying landlords will also no longer be able to claim tax relief above the 20% rate of tax on mortgage interest payments. This will largely impact ‘middle income’ earners in and around the 40% tax bracket before rental profits (it obviously affects higher earners, but middle earners will feel it the most).

Some will find it hard to empathise with ‘middle income’ landlords, who earn reasonable incomes and own property, but the question must be asked: Is it fair? Is it fair that one type of business can offset its costs against profits to mitigate higher rate tax, but a property business cannot? Personally I do not think it is fair, most importantly I think this will hit hard pressed tenants the most, as these costs will eventually be passed on in rent increases, which are already rising due to demand.  Rent may have to jump considerably to cover further taxes of 20-25% before achieving the same bottom line.

Get professional advice:

I always encourage anyone on a standard variable rate to review their mortgage and also to consider making overpayments. This will be good preparation for reported future rate rises, as overpayments can be reduced/stopped when interest rates eventually rise. Paying more to your mortgage will also reduce the impact of rate rises – the more/longer you overpay the better. If you can’t afford to make any overpayments now, then you need to think about how you will afford your mortgage when the rate rises and need to look at your expenditure now. Is £100 per month to Sky justifiable? Are you paying more for your utilities, mobile phones than you need too?

Most people should be OK, as the rates SHOULD increase slowly, my guess is it will be around 0.25 – 0.5 per a year unless drastic measures are required. The only problem with raising rates right now is it usually causes lower expenditure/lower growth/deflation – which the Government is trying to avoid. Of course there are plenty of decent reasons not to overpay, say for example if someone is overpaying to a credit card to get it cleared, that’s a priority in the short term.

Whether its mortgage, letting or tax advice I always urge family, friends and clients to get professional advice. In almost all cases, the time and money saved by using a professional more than offsets the costs involved. A jack of all trades is a master of none, you can’t expect to know every lenders criteria or their rates, the latest tenancy laws, be able to market your property, vet your clients whilst carrying out maintenance and few know HMRC’s complicated tax rules! A good Mortgage Adviser/Letting Agent/Accountant will always save you time and money – the key to a successful business.

Ben Adams
Independent Mortgage & Protection Adviser
CBK Wales
0300 303 8525
[email protected]