A cynic once said that when a government enters a social gathering as a guest, the private sector leaves. The current policy changes affecting the UK property market has invaded the festive gathering of investors and has emptied out the guests.
The new investment environment appears hostile to people looking to acquire property. The government has unleashed a Trojan horse of policies galloping through the marketplace, destroying anything in its path. So, anyone looking to invest in property needs to be innovative. Some of the draconian policies are as follows: First, the Bank of England is now intent on pursuing macro-prudential measures with a view to curbing excessive credit growth and encouraging reasonable borrowing in this ‘low for long’ interest rate environment.
The Financial Policy Committee (FPC) has introduced regulations requiring banks not to give residential mortgage to borrowers which are more than 4.5 times their income. It also requires banks to ‘stress test’ borrowers’ ability to repay the loan. Some banks now ask borrowers to raise 25% deposit before applying for a loan. As regards buy-to let (BTL) mortgage, how much an investor can borrow from the bank would depend on how much rent the property generates.
Most lenders expect the rent to be 25% more than the loan. Second, the government introduced the Finance Act 2015. As part of that Act, BTL landlords will be prevented from deducting their mortgage interest costs from their rental income when calculating taxable profit. This approach makes it unattractive to invest in the rental market. The policy, which appears more destructive to the market than any other, is the introduction of the new stamp duty surcharge.
Since 1 April 2016, anyone buying a second home would pay a higher rate of stamp duty, thereby making the cost of buying beyond the reach of ordinary people. This change of policy not only affects BTL investors but also some First Time Buyers (FTB). For example, a wife who is a FTB would pay the new surcharge if her husband already owns a property. As already stated, anyone now looking to invest in property needs to use guile, be tactful and innovative to overcome these hurdles. Lenders now look at borrowers’ outgoings and their income when determining loan affordability. FTB and BTL investors should therefore be moderate in spending as the last 6 months of their bank statements will be examined. Also, putting down a large deposit will facilitate favourable mortgage terms.
However, some banks are now giving 100% mortgage. For instance, Barclays Bank has recently introduced the 100% mortgage, which is good news for investors. Additionally, other lenders such as Nationwide and Halifax have relaxed the age restriction and have raised the limit to 80 years old, making loans accessible to older buyers.
The major challenge is being able to overcome the stamp duty surcharge hurdle. Most FTB can surmount this hurdle with ease since they are exempt from paying the extra 3% surcharge. They are nonetheless required to pay the lower stamp duty. But where the purchase price is below £40,000, stamp duty is not payable.
Another way to overcome paying the stamp duty surcharge is to negotiate with the developer (if the property is newly built) or with private sellers for them to cover the bill. Further, if a mixed investment (i.e. part residential and part commercial property) is purchased, the extra surcharge is not payable. Also, a property developer who buys a commercial unit and converts it to residential flats would not have to pay the extra stamp duty surcharge. This effectively reduces the cost of purchasing property.
Lastly, a property owner who lives in his main home can rent out the main house and buy another property. Although the stamp duty surcharge will initially be paid, this will be refunded if the original home is sold within 18 months. In the meantime, the owner can earn income from rent received within the 18 month window. In a nutshell, a buyer who is able to overcome the current challenges will likely enjoy the fruit of his labour.
For instance, in early 2015, the English Housing Survey found that increased wealth was generated from property investment. The total value of Britain’s housing stock is estimated at around £6trn. Property value in Britain increased by £385 billion since last year. So, any buyer who takes that small step towards property investment effectively takes a giant step towards wealth creation.
