HMO investors flock to auctions chasing high yields
Houses of multiple occupation (HMO) are in hot demand since chancellor Rishi Sunak introduced a stamp duty holiday which means no tax is paid on the first £500,000 of a residential property purchase.
Although landlords still have to pay the three per cent stamp duty charge, the temporary tax break can save investors thousands of pounds.
The HMO market has been given an additional boost by further government changes to planning laws that will allow commercial and retail premises to be converted into housing without full planning permission, extending the permitted developments that currently allow offices to be converted in the same way.
Tomer Aboody, director of property lender MT Finance, said auctions were “extremely busy” right now.
Plenty of stock is coming to the auction houses from investors looking to cash out of the market as it heats up, said Aboody, while experienced landlords were looking for HMOs to add to their portfolios.
The latest national report of auction activity from EIG showed that auctions were beginning to return to health, after stalling because of the halt on valuations.
Although the number of lots offered across the 43 auctions nationwide fell by close to 30 per cent in June, the percentage of those selling went up 13.5 per cent to 81 per cent.
HMO landlords can achieve yields upwards of eight to 10 per cent compared to a UK average of around five per cent for single tenant buy-to-let properties.
“Many investors looking to maximise yields are opting for HMOs,” says Abody. “It is an attractive asset class because the housing market is such that people will be renting for longer and there will be a steady supply of tenants.”
Ying Tan, chief executive of Dynamo, said: “We have definitely seen a rise in HMO enquiries from experienced investors. They are the ones seizing the opportunity right now. The stamp duty holiday has raised interest and investors are looking for the best return.”
Tan said HMOs have wide appeal for tenants because renting an individual room in a house is cheaper than paying for the whole house.
Risk versus reward
But there are risks that come with HMO letting, that investors must consider.
Tan added: “A lot of tenants who live in house shares may work in the hospitality trade, which has suffered job losses. The good thing about HMOs, however, is that there you can have five to six renters in your property and only need two or three of their payments to cover your mortgage.”
But the high yields should not trick investors into thinking HMOs are easy money.
Aboody said: “HMOs are only suitable for sophisticated investors who understand the market and what they are getting into. I would not advise first-time investors to go down this route.”
He added: “It is an extremely specialist regarding management and costings, where your perceived income yield is impacted by the managing expenses.”
UTB and Freedom Finance finalise offer using messenger app
The system eliminates the need for email and post as it allows brokers and lenders to digitally transfer and share customer documents and evidence such as biometric ID results, E-signed agreements, payslips and bank statements.
The instant messenger service also allows information to be exchanged immediately and shared with the customer throughout the course of a loan application.
The B2B Digital Messenger App was developed as a result of Nivo’s recently formed Second Charge Lenders Technology Steering Committee of which United Trust Bank, Freedom Finance and other second charge lenders and brokers are participants.
Buster Tolfree, commercial director – mortgages at United Trust Bank, said: “It is important for UTB and the second charge industry that we continue to create quicker, smarter and more secure means of processing applications and delivering great customer outcomes.”
Josh Bowe, head of digital operations at Freedom Finance, added: “We are delighted to partner with United Trust Bank on this initiative.
“We have already built a very strong partnership with UTB, but this innovative process further enhances our relationship as it enables faster and smoother underwriting across both businesses while improving our customers’ experience.”
Aspen completes £150k development exit bridge during lockdown
The money was required to complete the project in Llangollen, which has £50,000 of works outstanding.
Funds were also being used to improve cashflow and to secure the next development project nearby.
On top of national lockdown restrictions, the case was complicated as the current site was not signed off by building control and required rectifying works, plus the warranty was not finalised.
A quick turnaround was needed to ensure the subsequent purchase did not fall through.
The loan was completed on the lender’s stepped rate product, with the deal starting at 0.59 per cent per month for the first half of the 12 month term.
Legals and desktop valuations were instructed the day after the decision in principle following authorisation from the client and the broker.
Undertaking was then received same day.
The case was presented to Aspen by Zara Brindley of Top 10 Finance and, in-line with service level agreements, was handled by underwriter, Saif Khalique.
Jack Coombs, director at Aspen Bridging (pictured), said: “This case is testament to our expertise in development exit transactions, and would not have been possible without our desktop valuation system which was cost effective and time efficient in meeting the deadline for the client.
“Covid-19 is still causing disruption to normal practices, especially at that time of instructing the valuation as there had still been lockdown restrictions in Wales making it almost impossible to get a physical inspection.
“Our flexibility for development exit deals enabled the client to complete on their next site purchase even though the final warrantee hadn’t been obtained and there were further delays to the building control sign-off. Given all the circumstances surrounding the deal this is a pretty unique completion.”
‘We’re seeing the next generation of adverse credit coming’ – Jannels
Speaking on Specialist Lending Solutions Television in association with Pepper Money in February before the coronavirus lockdown, Jannels noted that mobile phone companies and car park enforcement were particularly strict.
“We’re seeing the next generation of adverse credit coming through, if you cough on your phone bill you’re slapped with a default almost immediately,” said Jannels.
“The biggest increase at the moment we’re seeing is car parking fines. People don’t want to pay a silly little charge because they went into a pet store, and then they’ve got private firms chasing them down.”
Jannels noted that things could escalate quickly and before they know it those parking charges are up to £700.
He added that the biggest surprise was people then buried their heads in the sand and did not think they could find a mortgage – instead dropping onto the lender’s standard variable rate or just not purchasing the property.
Citing its research, Pepper Money sales director Paul Adams noted that many people with credit issues fell into in the prime age of property purchase between the ages of 35 – 44.
“But surprisingly it’s not just the less affluent borrower customer, a lot of these customers, the majority in fact, are associated with the social grades associated with higher incomes,” he said.
“So a good 61 per cent of people looking to buy in the next 12 months were of those social grades where income and earnings aren’t a problem.”
Landlords have been focussing on managing and increasing portfolios – Griffiths
Mortgage payment deferrals, non-physical valuations, and other changes to our world came thick and fast.
While reduced lender capacity and appetite had an immediate and longer lasting impact on the residential sector, it quickly became clear that landlords’ focus was on the best way to manage and increase their portfolios.
Even though the possibility of house price deflation is a concern, other recent indicators give investors a more positive outlook.
Homelet recorded a yearly rise in rent of 1.1 per cent in June and Goodlord’s Letting Activity tracker jumped 18 per cent on completed lets in June compared to last year as pent up demand for new homes over lockdown translated into confirmed tenancies.
Advisers and lenders have certainly been kept busy by their landlord customers in recent weeks.
According to Twenty7Tec search volumes for buy-to-let products on their sourcing systems jumped by nearly 50 per cent between May and June as England opened up for physical valuations and were eight per cent higher than the number of searches in March this year.
Our own figures show the same trend.
Between February, the last full month before lockdown, and June this year we saw a 116 per cent increase in the number of applications and a 165 per cent increase in the total value of those applications.
As well as a healthy return to form for BTL, the increase in applications also highlights the agility of newer lenders.
In tough market conditions those that are able to step up with product availability and service delivery have an opportunity to develop new and existing intermediary relationships and maybe challenge the status quo – ultimately leading to healthier competition and better choice and outcomes for brokers and their clients.
If the latest figures we are seeing are indicative of the market as a whole they prove landlords can weather the storm and see the next buy-to-let normal as an opportunity.
Shawbrook profits fall 90 per cent as £24m loss on mortgages expected
The lender is also making a baseline prediction that house prices will fall 2.6 per cent in 2020 with another slight dip of 0.3 per cent in 2021, before recovering by more than three per cent in each of 2022, 2023 and 2024.
Overall, the lender posted a profit before tax of £5.9m in the first six months of 2020, down from £55.6m in the same period of 2019.
It expects coronavirus-related loan losses to reach more than £47m, in addition to its already projected £61.1m loss allowance.
Shawbrook said it had granted a total of 15,900 payment holidays to support customers with 10,800 still in force as at 30 July 2020.
Its property finance loan book, which includes buy-to-let, second charge and other specialist mortgages, grew by £300m during the period to £4.7bn.
However, Shawbrook did not disclose how much new lending it had completed during the period.
It said 6,200 property finance payment holidays had been granted up to 30 July 2020 covering 29 per cent of balances. Some 60 per cent of customers had matured from their first payment holiday with 4,100 still in force at 30 July.
The lender admitted property-related profit before tax has been hit by expected loan losses and slowing originations in the second quarter of 2020, but net operating income was two per cent higher at £72.5m.
“The property finance division had a positive start to the year and while Covid-19 inevitably slowed progress, the business delivered well throughout H1 2020, reflecting the depth of relationships held with our intermediary partners and the commitment and ability of staff to work remotely,” the lender said.
“The seamless move to remote working enabled us to maintain the strong relationships held with our specialist partners and customers, underpinned by a regular communication programme and the delivery of several product and system initiatives including the use of automated valuation models and new online application functionality for payment holiday requests.”
Second charge and BTL
On the residential side it said 2020 started well, “reflecting our renewed focus on the second charge mortgage market”.
“In January 2020, we restructured our sales team to deepen relationships with our existing intermediary partners and to adopt a more proactive approach to new business.
“As a result, in Q1 2020 we saw improved levels of new lending and, although this has since fallen, we have continued to complete new business throughout the period,” it added.
Where buy-to-let (BTL) was concerned, it noted: “We have now laid the foundations for a fully digitalised mortgage journey across all of our products and in H2 2020 we will continue to develop this technology to improve the application process.”
Development finance is included within the business finance division, alongside asset finance, corporate lending and structured finance for SME customers.
Here, 4,300 customer payment holidays were granted up to 30 July 2020, covering 39 per cent of balances – 66 per cent of these customers have matured from their first payment holiday with 2,500 still in force at 30 July.
It noted that with several transactions completed in January 2020, the business exceeded £500m of facilities for the first time, but added that the lockdown had delayed some projects.
“The solid Q1 momentum advanced the business through the second quarter, delivering on commitments made pre-lockdown, despite the practical and logistical challenges created by the crisis,” it said.
“To date our existing development finance portfolio continues to perform well, however, active monitoring suggests some schemes may take longer to complete due to delays caused by the UK lockdown.”
Recovery in new lending
Shawbrook chief financial officer Dylan Minto said that even allowing for the loss adjustments the group was profitable for the half year, with strong liquidity and capital ratios.
“While we have started to see a recovery in loan originations across some of our markets, H2 2020 trading performance will be dependent on the speed of economic recovery as the lockdown restrictions ease,” he said.
“However, the longer-term economic impact of Covid-19 remains unclear and will be tested further when the UK government relief packages are withdrawn and as payment holidays end.”
Vernon BS adds pair of holiday let mortgages
It said the popularity of domestic holidays and the high potential returns were attracting traditional landlords to this specialist sector.
Vernon added it has also seen increased enquiries from holiday homeowners looking to remortgage or expand their portfolio.
Discount rate deals
The lender is now offering separate holiday let mortgages for individual landlords and limited company landlords.
Both mortgages are available at up to 75 per cent loan to value (LTV), come with a £999 fee and are allow loans from £100,000 to £1m, providing the property is worth at least £300,000.
For individual landlords there is a three-year discounted rate deal, currently at 2.9 per cent.
For limited company borrowers it is a two-year discounted rate, currently at 3.05 per cent.
Tom Gurrie, intermediary sales manager at Vernon BS, said: “Holiday lets were already a growing sector for us but, in recent months, we’ve seen a great deal of interest from landlords.
“They’re looking to purchase property in coastal locations, big cities and other tourist hotspots to take advantage of the growing demand for staycations.”
Permitted developments to pay contribution levy as government looks to SME builders
However, the exemption will be continued for self-build and custom-build development.
At present PD conversion schemes are excluded from the Community Infrastructure Levy and planning obligations which can be levied by local authorities.
However, the latest proposals would bring together these developer contributions into one Infrastructure Levy set by central government, with PD schemes included.
The government said it wanted to use the reformed Infrastructure Levy to raise more revenue than the current system and deliver at least as much affordable housing.
“In making this change to developer contributions for new development, the scope of the Infrastructure Levy would be extended to better capture changes of use which require planning permission, even where there is no additional floorspace, and for some permitted development rights including office to residential conversions and new demolition and rebuild permitted development rights,” the consultation said.
“This approach would increase the levy base, and would allow these developments to better contribute to infrastructure delivery and making development acceptable to the community,” it added.
The levy would be charged on the final value of a development based on the rate at the point planning permission is granted.
It would be charged at the point of occupation and would only apply above a minimum threshold to prevent low viability developments becoming unviable, while the levy would only be charged on the value exceeding the threshold.
This would “provide greater certainty for communities and developers about what the level of developer contributions are expected alongside new development” the government argued.
Small builders key players
Despite this focus on permitted development rights, the government has also said it is targeting small and medium builders to put the planning reforms into action.
It believes a greater role for smaller builders will increase the number of properties built and speed of development.
The proposals suggest that plans for large sites should seek to include a variety of development types by different builders which allow more phases to come forward together.
“The changes will be a major boost to SME builders currently cut off by the planning process,” it said.
“They will be key players in getting the country building on the scale needed to drive our economic recovery, while leading housebuilding that is beautiful and builds on local heritage and character.
“The current system has shown itself to be unfavourable to small businesses, with the proportion of new homebuilding they lead on dropping drastically from 40 per cent 30 years ago to just 12 per cent today.
“Recent studies show smaller firms feel the complexities of the planning process and its associated risks, delays and costs are the key challenges they face in homebuilding.”
Second charge volumes fall 71 per cent in June – FLA
Figures from the Finance and Leasing Association (FLA) showed the value of new business in the month reached £27m, a decline of 74 per cent compared to last year.
For the 12 months to June, the value of new second charge business reached £1.03bn and there were 23,156 agreements.
Compared to the previous 12 months, both the value and number of agreements saw respective falls of 11 per cent.
Geraldine Kilkelly (pictured), head of research and chief economist at the FLA, said: “The relatively slow recovery in second charge mortgage new business volumes reflects the gradual re-opening of the economy and continued household caution as the outlook for employment and the progression of the virus remains uncertain.
“Lenders are continuing to do all they can to support customers during this challenging period and customers experiencing payment difficulties should contact their lender as soon as possible.”
Mantra Capital advises on £10m deal for 270 properties with LendInvest
The loan from LendInvest went towards the refinancing of a residential site and the acquisition of a second adjoining site. Some 272 residential properties are expected to be built on the sites in the last quarter of this year.
The development is located is in Abbey Wood, and on completion will feature a mix of one-, two-, three- and four-bedroom apartments and townhouses, 35 per cent of which will be affordable housing.
The loan was provided based on a loan to cost (LTC) of 90 per cent with Mantra Capital acted as the broker for the deal.
The brokerage originally sourced funding before the impact of Covid-19 hit the market, and the initial lender was unable to honour the terms of the agreement.
Justin Trowse, director for bridging at LendInvest, said: “This deal was one that we were determined to deliver and complete in time so as not to disrupt the borrower’s project timeline.
“Thanks to the tireless efforts of Rickesh at Mantra, and the dedication of the team, we are delighted to announce the provision of quality funding for this project.”
Rickesh Patel, partner at Mantra Capital, added: “Our close funding partners LendInvest quickly understood the scheme, the challenges we faced in terms of timescales and came up with a deliverable debt package that worked for our client. Their experience and knowledge was clear to see.
“The deal wasn’t without its challenges, but with the hard work and collaboration of Justin and the wider LendInvest team we were able to get this acquisition deal completed and deliver a commercial solution that worked for all parties.”