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On October 1st 2018 changes to the mandatory licensing of Houses in Multiple Occupation (HMOs) were introduced in England. There is now a revised definition of an HMO under the Housing Act 2004, which means that for licensing purposes, an HMO is any property occupied by five or more people,forming two or more separate households. This contrasts with the previous definition which also included that the property comprised three or more storeys.
The RLA has estimated that an extra 177,000 HMOs will now be subject to the new mandatory licensing in England. Licences issued under the previous definition will still be valid until the expiry date when a new licence will need to be applied for under the new rules. Landlords who find that their existing properties now require a licence should apply through the local council.
Perhaps more significantly is the introduction of minimum bedroom sizes for mandatory or additional HMO licences. The new mandatory licence conditions include notifying the local authority of any rooms with a floor area of less than 4.64 square metres; having a minimum of 6.51 square metres for sleeping accommodation for tenants over 10 years old and a minimum of 4.64 square metres sleeping for persons aged under 10.
Breaches of the rules relating to minimum room sizes could lead to a criminal conviction resulting in a significant fine or civil penalty. However,if a breach occurs the local authorities will allow a reasonable time (up to 18 months) for the problem to be rectified.
These changes will certainly have an impact on the buy-to-let market. It is likely that there will be a considerable number of landlords looking to make modifications to their HMO properties in order to comply with the new room size requirements. This may include reducing the number of rooms in a property, which could have a knock-on effect on the amount of rent that can be charged overall. Having a reduced rental income may affect a landlord’s ability to meet lender rent stress tests when applying for mortgage finance.
It is not clear how the new rules will affect buy-to-let mortgage lending, what approach lenders are taking if they identify HMOs that are in breach of mandatory licensing, and what guidelines are being provided for carrying out valuations on HMOs. As with any significant change it can take time for it to bed in.
From a broker perspective, it makes sense to check that any landlord seeking finance for an HMO is aware of the new rules and has taken the necessary steps to comply. This change to licensing may also provide an opportunity to talk to buy-to-let clients about their plans to undertake any alterations to their HMO properties in order to meet minimum room size requirements. As a result, there could bean increase in demand for short term finance to make alterations or to buy properties that need modifying before remortgaging onto a term loan.
Bridging is becoming a more popular option for short term projects and purchasing properties that are not currently mortgageable. There is a wide range of bridging lenders available in the marketplace with varying rates and different lending criteria to suit a multitude of situations. Due to increased demand, TBMC has recently reviewed the bridging loan market and will be providing an expanded lender panel to help place short term finance cases.
A report from Shawbrook Bank about the buy-to-let mortgage market has analysed in some depth the impact of the 3 percent surcharge on the purchases of second homes, mortgage interest tax relief changes, the introduction of the PRA regulations and tighter underwriting criteria for professional landlords.
The report highlighted the recent decline in buy-to-let purchase transactions but recognised the robust remortgaging market due to current low interest rates. It predicts a further slow down of the market over the next few years which will impact the amount of buy-to-let mortgage business being written by intermediaries.
Despite a sobering outlook for the immediate future, there are still plenty of opportunities for brokers in the buy-to-let market and some lenders are trying to provide more innovative financial solutions.
There was a time when there was a good selection of lenders offering light refurbishment schemes which would enable landlords to carry out necessary works on their properties such as boiler replacements, new kitchens,bathrooms and carpets etc.
However, in recent years most lenders have withdrawn their refurbishment products and until last month TBMC has only had Shawbrook Bank and Saffron Building Society on its panel for this type of offering. This has limited the options for landlords looking to purchase at auction, for example, or purchasing under valuation or choosing to refurbish to maximise the rental yield of their property.
Currently many landlords undertaking this type of investment will secure bridging finance then try to line up a suitable buy-to-let mortgage as an exit route. However, they will often have to wait until the work is completed before lenders will carry out a valuation and offer terms.
Precise Mortgages recently launched a new refurbishment buy-to-let scheme through TBMC, which offers the flexibility of bridging finance up to 75 per cent loan-to-value with the security of a long term buy-to-let mortgage up to 80 per cent loan-to-value once the property has been refurbished.
The guarantee of a competitively priced mortgage as an exit route should be an attractive proposition to landlords who can now approach refurbishment opportunities more confidently and we have already received considerable interest in this new scheme.
With the challenges in the buy-to-let market over the last couple of years, many brokers have turned to bridging finance as a way to supplement their incomes and the sector has been booming. According to the Association of Short Term Lenders annual bridging completions are around 27 per cent higher in 2018 so far compared with last year, which underscores the opportunity here.
The reputation that bridging has had of being punitively expensive seem to be diminishing and if used intelligently it can be an excellent resource for buy-to-let investors, enabling them to make the most of opportunities and bargains in the rental property market.
At TBMC, we have expanded our bridging panel to offer a broad range of options and competitive deals for brokers and their landlord clients. Bridging can provide a healthy additional income stream and is likely to generate follow on business for arranging an exit mortgage from the bridge.
At TBMC, we also receive a good number of enquiries about semi-commercial properties which can offer an excellent investment opportunity and avoid the higher stamp duty applied to second homes. For example, a single freehold that includes a commercial property, such as a shop with living accommodation above it, is not subject to the 3 per cent levy increase imposed in 2016.
TBMC has a few lenders on its buy-to-let panel who have an appetite for semi-commercial finance such as Interbay and Shawbrook, and an extensive list of lenders via our TBMC Commercial proposition, so brokers can welcome these cases as they can be quite straightforward to place.
In conclusion, despite the contraction of the buy-to-let mortgage market, there is still plenty of business to be written and with the right skills and knowledge of product providers, brokers can look forward to profitable endeavours within the investment property sector.
At TBMC we have seen a noticeable uplift in buy-to-let expat enquiries from brokers and landlords over the last year, which affirms predictions after the Brexit referendum that the resulting weakened pound may make the prospect of investing in UK rental property an increasingly attractive option for those living abroad.
Many expats are keen to keep a connection with the UK and the yields on properties in the UK are often way ahead of other countries. So,despite the Government’s initiatives to dampen buy-to-let purchases over the last couple of years, expat appetite shows no signs of abating.
The higher demand for expat mortgages has resulted in an increased number of lenders and products available for UK citizens who are living and working abroad. In fact, TBMC has added 7 new lenders to its expat panel in the last 18 months and now offers expat products from 16 different lenders. Recent additions include Foundation Homeloans, Vida Home Loans, Castle Trust, Together and State Bank of India.
When dealing with expat enquiries there are certain factors to consider for placing cases successfully. Most lenders require applicants to own an existing property in the UK – either residential or buy-to-let – and to have a UK bank account. However, we often get calls about clients who have sold their home to move abroad and therefore are not current UK property owners. In which case there are just a few options available on our panel namely Skipton International, Together and Saffron Building Society.
Clearly, country of residence is an important factor when placing expat cases as many lenders either publish acceptable countries or have a list of banned countries. Most lenders accept all EEA countries and many include those on the FATF list. Any countries that are sanctioned or considered high risk are likely to be effectively black listed.
At TBMC we mostly get enquiries for expats living in the EU, USA,Hong Kong and Singapore. Also, Australia seems to be an increasingly popular destination with more lenders accepting applicants who are living Down Under.
Lenders often have a higher minimum loan size for expat mortgages of between £100,000 and £150,000, although this is not always the case and lower loans are available. Saffron Building Society has a minimum loan of £30,000,alongside no major restrictions on country and no minimum income requirement either.
Expat lenders usually have a higher minimum income requirement than for standard mortgages. For example, Axis Bank has a minimum of £40,000 and Interbay has a minimum of £50,000. Even higher incomes may be required for self-employed applicants such as an equity partner in a law firm or a business owner with an internationally recognised accountant.
Alongside higher income criteria, most lenders are particular about the type of employment the applicants undertake, such as requiring expats to be a professional or employed in a senior position within a UK, EU or US agency or recognisable and traceable company.
Some lenders extend their standard range products to expat customers with a few caveats to their mainstream criteria. Others have specific expat ranges such as with Landbay and Vida Homeloans.
If you are regularly receiving expat enquiries it is worthwhile getting as much information about the client’s circumstances as possible at the outset as this can help to narrow down lender options early in the process. TBMC is well placed to help with expat cases and has up-to-date knowledge on lending policies in the marketplace.
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