Category Archives: mortgages

Rising rates promise to upset returns for small landlords

Britain’s small time buy to let landlords could be in line for a shock, as interest rates rise. Many could see their cash flow turn negative by 2017 as rising mortgage rates collide with a practical ceiling on the amount tenants can afford to pay.

The situation could present many small landlords – those with typically just one property – with a headache, that could trigger a round of selling out of the sector. At the same time, the change could present institutional investor landlords – many of whom are poised on the edge of the market – with an opportunity to buy into the sector. Their longer term interest, and access to finance that is not prone to the short term fluctuations of the UK mortgage market, could still offer the opportunity for good medium term returns from the UK private rented sector.

The problem has been flagged up by the Telegraph newspaper, which has researched the impact of rising interest rates on buy to let mortgages. It notes figures from the Council of Mortgage Lenders showing that mortgage lending to landlords has increased 44% since the end of 2011. And rates being offered to buy to let landlords are lower than they were even in the property boom years of 2005 and 2006.

Taking comments from Bank of England governor Mark Carney, about a “return to normal” that will see interest rates rising to potentially 3% by 2017, the Telegraph has mapped the likely impact on these cheap landlord mortgages. Currently such loans are offered at bank base rate plus 3.4%; were that margin to be maintained, then a landlord would be faced with a 6.4% interest rate in 2017. Assuming a 70% loan to value mortgage, a current average £633 per month mortgage on a London rental property will rise in cost to £1,088; the return to a landlord will drop from £458 currently, to £33 per month – not enough to cover rental voids or maintenance costs.

Any hopes of increasing rents to cover rising costs are dashed by the view of specialists in the letting sector who warn of a “rent ceiling” in many places – dictated by increasing supply, and the fact that many renters are already squeezed by rising living costs, and wages that are static.

More from the Telegraph here.

Rent arrears fall will encourage investor sentiment

The number of UK residential tenants in serious rent arrears is down 35% year on year. Around 68,000 households remain seriously behind with payments, according to the latest Tenant Arrears Tracker from LSL Property Services.

The number of 68,000 relates to those two months or more behind on their rent payments, with the overall drop coming despite an 11.1% seasonal rise in cases of severe arrears. The number represents 1.4% of all tenancies, down from 2.3% a year ago. Overall tenant arrears, a wider measure, are also down, and stand at the second lowest level on record, at 6.9% of all rent paid being late or currently unpaid, as of February.

The news will encourage private rented sector landlords, believe LSL. David Brown from LSL Property Services commented: “The incentive for investment in the private rented sector is already growing on the back of solid rental yields and gathering capital accumulation – but now lower risk is proving to be the cherry on top for potential investors.”

While professional private landlords are generally funded using longer term debt finance, small time landlords in the UK market are often exposed to the short term mortgage finance market. And a tenant delaying rent payments can sometimes cause them to get into arrears with the mortgage payments they are responsible for. Paul Jardine, a receiver at Templeton LPA, part of the LSL group, said landlord mortgage arrears levels are dropping: “”Caution is still advisable, and landlords must maintain regular communication with tenants. Yet the next 12 months could be a real turning point.”

Pocket puts London apartments in the affordable bracket

This is an edited version of a feature that originally appeared in City Planning, and appears with the editor’s permission

London’s crazy housing market makes it increasingly difficult for “normal” people – those with a job and a half decent wage, who are considered too well off for housing association homes – to find somewhere affordable to live.

They end up sharing with mates…….for years. Or live far out from London, with an exhausting train commute to lengthen their long working days. So here’s an alternative that is working to bridge the gap.

Pocket Housing is the company starting a quiet revolution. Pocket, founded by Marc Vlessing and Paul Harbard, has developed a new model for delivering housing for urban professionals, people who will never get on a local authority housing list, and will struggle to afford an open market mortgage on their salary. They don’t do a preferred job in the fire service or NHS, so don’t qualify for typical shared ownership schemes, either. And culturally, they would prefer to buy.

There are thousands of these people working in London, who at the beginning of the last boom would have just about afforded to get on the housing ladder. Today, they are confined to renting a shared home, commuting from miles away, or living in the parental home they had long hoped to leave.

The unlikely vanguard for this coming revolution is a subtle but smart block of apartments being finished in a side street in Westbourne Park. Here, the Pocket model of small, affordable apartments for sale to a restricted market of buyers has once again been proven – but this time around, it has attracted mainstream interest from Westminster’s planners, and from a major developer in the form of Land Securities.

Pocket's completed project in Westbourne Park

Pocket’s completed project in Westbourne Park

The breakthrough has taken place in two stages. First, Land Securities came to Pocket, realising that they had a problem. Quite simply, navigating Westminster City Council’s current affordable housing policy can be slow, cumbersome and leads to considerable expenditure on consultants and advisers. “Big developers tie themselves in knots,” says Vlessing.

Westminster’s preferred option for on-site affordable housing often creates architectural complications. The second option, searching for a local site to fit the housing, takes time, trouble and expense; while the third option, paying an affordable housing contribution instead, means hiring expensive consultants to prove the first two options aren’t viable. Land Secs were prepared to take a punt, and fund the land for a Pocket scheme that could be declared affordable.

To make the idea fly, Pocket opened discussions with Westminster, who have now accepted the principle of their apartments as affordable housing, and of the developer’s cash commitment as an affordable housing contribution. “It crystallised a subsidy, and that is now a credit that Land Secs can use,” says Vlessing.

The Westbourne Park site cost around £2m, and was bought with residential permission. Pocket substantially increased the density, obtaining a new permission for 32 units. All are one bedroom flats, designed for singles or couples, and there is no on-site parking as the site is just minutes from an Underground station. Unlike a typical private sector scheme, the Pocket project was designed to comfortably exceed current green building requirements: the building meets code 4, with ground source heat pumps, centralised underfloor heating, and a green wall on the block’s south face.

This subsidised, restricted market sale model fits in a gap between open market housing, and a very limited supply of shared ownership homes. Most affordable housing contributions head via housing associations to deliver units that are rented to those on low or no incomes, with the government often paying some or all of the rents via the benefits system.

Having taken the risk, Land Securities have now proved that there is a new, more efficient way to support affordable housing through the planning system – and opened up this new tier of housing for sale. And with the credit concept established, Pocket’s directors believe they have the key to getting traction. “It allows us to buy small infill sites when they become available, and we can bank those sites,” says Vlessing. “Everybody’s a winner,” adds Harbard.

“We make it very clear what everything costs,” says Vlessing, and an open book approach helps all the parties understand the level of subsidy each project needs. With the apartments restricted in perpetuity so they can only be purchased by people below a maximum earnings threshold of £61,400pa, who have either lived or worked in the vicinity for the previous 12 months and are on a vetted register, “our homes remain affordable”. These restrictions are fully compliant with the affordable housing requirements laid out in PPS3.

At Westbourne Park, the one bedroom flats have sold out at around £180,000 each, with many residents moving in before contractors have finished the common areas of the scheme. “There are no demand constraints,” says Vlessing – he could sell hundreds of the apartments this year, if they could be subsidised and built.

So could this work elsewhere? Vlessing thinks the model would be right in the City of London, where there are similar pressures to create more residential development, often exclusively for high end occupiers. Says Vlessing: “It’s time to do something. I’d be surprised if we’re not in the City by the end of this year.”

What is a Pocket apartment? The model has been fine-tuned over six schemes, and at Westbourne Park the 32 apartments are:
• One bedroomed – development economics dictate this is the most viable unit
• Around 38 sq metres floor area – this has varied a little from scheme to scheme, but Westbourne Park is now the standard
• Well specified and fully fitted out, with underfloor heating, real wood floors, ample cupboards and fitted wardrobes
• In a code four block, complete with green wall and ground source heat pumps
• Designed to police-approved layouts to enhance residents’ safety
• Fitted with an external store to accommodate cycles
• Planned to cut maintenance costs, with thoughtful touches such as easy access cisterns and stopcocks, to prevent water damage

Who buys a Pocket apartment?
The typical Pocket buyer is:
• 32 years old
• earning around £38-40k per annum
• someone who loves their job
• single (70% of buyers are)
• female (around 65% of buyers are)
• a renter for the previous 8 years

A typical Pocket apartment interior

A typical Pocket apartment interior

Rental market serves many purposes

Younger people value the flexibility of renting, while many do so because they cannot save enough to try the alternative of buying a home. And for the over 45s, often their criteria fail to make them attractive enough for a mortgage offer, also effectively freezing them out of buying.

These are just some of the facts uncovered by a Savills research paper, reported in the Independent here.

Renting seems a second class option, for a good number of renters. But with a rising housing market, their chances of getting a deposit together, and qualifying for a mortgage, are not likely to improve.

But look at it another way. If the rental market was altogether more professional, and offered a variety of choices, then maybe it would be more fundamentally attractive. Right now, the private rented sector in the UK is characterised by small landlords, many of them buy to let individuals or couples who see the second house they own and rent out as part of their retirement pot.

The Independent quotes Susan Emmett of Savills: “We expect that a better quality private rented sector would prompt more people to rent through choice rather than necessity.” Several companies are now homing in on the potential of this market, and in five years we can expect to see some leading home rental brands emerging – brands that people will specifically want to rent their home from.

Buyers failing to prepare for Help to Buy

More than a third of 20-40 year olds are hoping to tap the government’s Help to Buy scheme this year, but many of them are ill-prepared to meet the initial requirements of the scheme.

Basic errors such as not being listed on the electoral roll are common, according to research by Experian CreditExpert. A lack of savings or poor payment history on something as inconsequential as a mobile phone account can also contribute to a weak credit record, affecting applications for a mortgage negatively.

The Experian CreditExpert research found just 40% of Help to Buy hopefuls were registered on the electoral roll at their current address. A quarter have never reviewed their credit record, while 7% have saved nothing towards a deposit. Less than three quarters have actually saved the minimum £5,000 required to get into Help to Buy.

“Help to Buy has brought home ownership within touching distance for thousands of younger buyers earlier than they may have dreamt possible,” said Peter Turner, managing director of Experian Consumer Services. “But it’s important to remember that the deposit is only part of the equation and consideration must be given to how much you can afford to borrow – and crucially, repay, in the years to come.”

The research discovered that 25% of the hopefuls have never checked their credit report; however, 31% are switched on to the issue, and have checked their file in the last three months. One in seven admit they have been managing their current credit accounts poorly.

Interestingly, men are likely to have saved more – 47% have more than £10k in savings, compared with just 33% of women. Unsurprisingly, Londoners have the biggest deposits saved, more than half having more than £10k and 19% having double that ready to put down. Currently, the hopefuls have an average £4,600 in other borrowing already against their name.

Turner also warned: “Anyone looking to make the most of Help to Buy would be well advised to check their credit report to better understand their credit history, and ask for help if needed, to ensure your credit report pains the best possible picture – before you make your application. Hopefuls should also note that in the short term, future applications for credit could be negatively affected as lenders may want to see how well you are repaying your current credit commitments, before offering you any more credit.”

Take a closer look at the Experian report here.