The comments came in response to a warning from Nick Raynsford, former minster for housing and planning, that evidence of PD’s negative impact in housing “is now overwhelming.”
Raynsford last week updated his Review of Planning in England, first published in November 2018, with the stark assessment that “the risk of building slums has now become a reality.”
The updated report singled out a PD site in Watford, The Wellstones (pictured, with Raynsford), asking: “Surely we can do better than this in providing new affordable homes in good quality living environments?”
Brokers agreed some PD projects had been of “lesser quality,” particularly during the early days of the regime.
But they added lenders and borrowers had gone through a learning process as to what constitutes a good quality project.
“In specialist lending you do get a mixed bag of clientele, experience and the kind of projects those people will deliver,” said Steve Watts, short term lending and development finance specialist at Brightstar Financial.
“PD gives less experienced developers a bit more opportunity, but obviously the downside is where some inexperienced developers have taken on these projects the level of quality can – not always, but can – lead to a lesser quality finish on the residential assets that are left there.”
However, Watts argued that the sector had learned by experience.
“Inexperienced developers are aware that they are not going to be able to fund massive, multi-million pound projects, and lenders are going to confirm, ‘actually, as a developer you’re not ready for this yet’,” he added.
Lenders getting wise
Dave Pinnington, director, intermediary relations at Finance 4 Business, outlined how lenders’ had “got wise to people trying to stack ‘em high and sell ‘em cheap.”
“People might try putting apartments with square footage where it’s physically impossible to live in that square footage. Lenders have got wise to that now,” Pinnington said.
“A lot of lenders now say they won’t touch projects over 50 or 60 units, or those below a certain square footage, because they know it’s not ideal living conditions for anybody.
“Just because it’s profitable for a developer doesn’t mean it’s right for the end user,” he added.
Pinnington noted that the collapse of peer-to-peer specialist lender Lendy in July 2019, had “really opened people’s eyes.
“A broker worth their salt would have been a layer of protection, but they were a peer-to-peer lender,” Pinnington continued.
“The high street won’t go near some business and rightly so. The challenger banks are very, very sensible. They have very, very good and solid credit committees that judge each development properly. Often they will send people round to monitor developments on a monthly basis with quantity surveyor reports.
“In development finance a lot of lenders deal with a very limited panel of brokers because they don’t want every Tom, Dick and Harry having access to their money,” he said.
“The problem is with some not-so-well-known lenders that are willing to try making a very profitable return, but without the necessary due diligence,” Pinnington added.
Clients moving on
Westley Richards, founder and director at West Rock Capital, explained how in a previous role he had arranged finance for what was then considered the largest PD scheme in the UK.
The collection of four office blocks, which includes the former headquarters of Sky in Brentwood, Essex, is currently under conversion into 270 studio, one- and two-bedroom apartments.
Richards echoed that lenders have tightened up on which PDs they want to back.
“What we’re seeing, with a lot of lenders at the moment, is they’re not for or against PD but are very much of the opinion that certain of these buildings will lend themselves to residential conversion and others won’t,” he said.
“Meaning that even if you’re able to obtain the consent for PD, that doesn’t mean it’s a project they’ll support.”
He citied buildings with long, dark corridors and those situated in industrial estates as examples of where lenders are likely to think twice.
“In any case,” Richards added, “there aren’t too many building left that are suitable for converting into housing. Clients are moving on to the kinds of premises where it will require full planning consent rather than PDRs.”
Demolition and rebuild proposal
Further, brokers expressed muted enthusiasm for the government’s proposal — floated last October — to extend PD, allowing for two floors be added to existing buildings, and demolition and rebuilding through “permission in principle”.
“There’s every possibility that making knock down and rebuild part of PD is maybe not such a good idea,” said Watts.
“You could get a lot of inexperienced developers knocking down a building and then finding it’s going to be a lot more painstaking to complete the final development than they had planned for,
“It’s a worse case scenario — you don’t want to think of everyone knocking down buildings just because they can — but there will certainly be a few who think themselves more capable than they are,” he added.
Darren Perry has been promoted to the newly created role of national account manager.
Perry will work with Brightstar’s network and club partners as well as appointed representatives and members making sure they have the right tools and support grow their businesses, the firm said.
Alongside Perry’s promotion, Michelle Westley, head of marketing at Brightstar Financial, will expand her role, working with the management teams at networks and clubs.
Brightstar will also be expanding its team, with the recruitment of an internal sales and marketing executive.
Bradley Moore (pictured), managing director at Brightstar Financial, said: “We firmly believe that there is absolutely no reason why a broker should turn away any genuine client and are always on hand to ensure complex cases are made easy.
“In his new role, Darren will work collaboratively with Brightstar’s partners to make sure more brokers are able to identify and place even more possibilities, and more clients can benefit from an expert approach to specialist finance.”
Darren Perry, national account manager at Brightstar Financial, added: “I’ve worked at Brightstar, as an expert in second charge mortgages, for a number of years now and I have first-hand experience of what a difference we can make to the lives of our brokers and their clients.
“I’m really looking forward to getting stuck into this new role and, working alongside Michelle, helping more of our partners to create more opportunities for their brokers, and more solutions for clients.”
The client built a block of flats using a development finance loan which was due for redemption, but a deal to sell off some of the units to a housing association had been delayed.
There was also an ongoing legal dispute, which needed to be resolved prior to completion on the loan.
Brightstar turned to Castle Trust, which structured the deal as two simultaneous bridging loans ‒ one with interest serviced on a monthly basis, and the other with the interest rolled up. This means the client is able to manage their cash flow until the sales go through.
Rob Jupp (pictured), group CEO of Brightstar Financial, said that the case was an example of how working with the right partner can make a deal which seems impossible completely achievable.
He continued: “Our relationship with the lender meant we were able to work together to structure a loan with a high exposure that took legal charge over the entire development and secured funding on a high loan to value against the block value of the site. This demonstrates the value of great partnerships.”
Barry Searle, managing director of mortgages at Castle Trust, said the case showed the value of working with specialists that understand the market and how to structure solutions.
He added: “The client faced a real problem, but we were able to work together with Brightstar to get them out of a hole and deliver a solution that will help them to achieve a successful result to their development.”
The series starts with Precise Mortgages highlighting 10 opportunities for brokers to contact landlords within the next year, on Wednesday 11 September.
Then on Thursday 12 September, United Trust Bank will present a webinar on the many uses of bridging finance.
The series is slated to continue throughout the autumn with webinars from Kensington, Masthaven, MTF, Pepper Money and Shawbrook. They are expected to cover topics such as specialist residential, short term lending, second charge mortgages, complex buy-to-let, unsecured business loans and later life lending.
Michelle Westley (pictured), Brightstar Financial’s head of marketing, said: “Borrowers increasingly have a diverse range of circumstances to which lenders are responding. But we still hear of brokers turning away clients with complex requirements believing that they don’t have the time or expertise to identify an appropriate solution.”
“Our autumn webinars series aims to demystify the sector and give brokers direct access to some of the industry’s leading experts. You don’t have to be an expert for you and your clients to benefit from the specialist market. You just need to partner with a business that has the right resource and expertise,” Westley added.
More information is available on the Brightstar website here.
The Financial Intermediary and Broker Association (FIBA) said it would start publishing lenders’ rates in its online directory to provide greater transparency about facility extension charges that are imposed by lenders.
The Association of Short Term Lenders (ASTL) has supported this position, saying that its code of conduct for members was amended in 2017 to ensure all lender members applying an alternative higher interest rate, such as the default of a loan, must make this clear and transparent in all of their documentation.
This transparency is important.
Default rates act as an incentive for a borrower to investigate alternative options as they approach the end of a term. Customers can only make fully informed decisions when they are presented with all of the information.
In the current market, with properties taking longer to sell because of Brexit uncertainty, this information is relevant to more borrowers.
Sales taking longer
Our experience is that more than half of borrowers plan to exit through a sale of the property and transactions are currently taking much longer to complete and falling through more frequently.
It’s at this stage, when it looks like an exit through a sale of the property is unlikely within the timeframe, that a re-bridge is needed and early communication between lender, broker and borrower is required.
That’s why most responsible lenders and brokers will keep an open dialogue with borrowers throughout the term, requesting marketing updates and progress reports at least every three months following drawdown of the loan.
That way, if there is an issue, they can agree a revised marketing strategy, such as a reduction in asking price, or even discuss an alternate exit strategy such as refinance, early enough to avoid default interest.
Regulated vs non-regulated
There is disparity between regulated and non-regulated lenders in their approach to default interest charging and how willing the lender is to work with the borrower to avoid default rates and repossession.
Lenders in the non-regulated space are generally less tolerant of borrowers going over the initial term and more willing to enforce loans in default.
This is not a surprise, given that these lenders are not governed by the Financial Conduct Authority (FCA).
But there is room to improve default handling in the non-regulated lending space and all lenders, whether they are FCA regulated or not, should adopt a fair Treating Customers Fairly (TCF) policy. Many do, but in my opinion an equal number do not and those that do not need to do some work here.
This debate about default rates is a timely reminder to be proactive in contacting your clients throughout the term of their loan, particularly in the current market.
If your client is struggling to exit through a sale, consider partnering with an expert in this sector to help find the right refinance solution for your client.
With proper planning and partnerships there is no reason why your clients should have to endure the expense of paying default rates.
With tax returns for 2017-2018 now being submitted ahead of the end of January deadline, these will be the first to include the staggered removal of mortgage interest tax relief on rental income.
Consequently, many of those returns will result in a larger than expected bill for some of your clients.
In last month’s column I discussed the potential solution of using a limited company to address this situation.
This month I spoke to Alex Bari, tax partner at Barnes Roffe LLP for an expert view of what the tax changes could mean for your clients and their plans.
How much?
JL: Which landlords can expect a larger tax bill this year, and by how much are their bills likely to increase?
AB: Individual residential landlords with mortgages on their properties will be affected if they are higher or additional rate taxpayers or pushed into higher or additional rates by the new mortgage interest relief restriction rules.
The first year that the rules came into effect was for the year ending 5th April 2018. However, as the due date of tax for said year is 31st January 2019, people will be feeling the pinch for the first time soon.
It is difficult to quantify the increase as it depends on a number of factors, however, as a rule of thumb:
- Higher rate taxpayers will pay additional tax equivalent to 5% of their interest cost and additional rate taxpayers will pay additional tax of the equivalent of 6.25% of their annual interest cost for the year ended 5th April 2018.
- The above could be worse for some people if they are pushed into the higher or additional rate tax bands by the mechanics of the above rules or it causes them to have their personal allowance tapered away.
JL: Will their bills increase further in the coming years and by how much?
AB: Yes, again as a rule of thumb Higher Rate taxpayers will pay 10% of their interest as additional tax in 2018/2019, 15% in 2019/2020 and 20% in 2020/2021.
Additional rate taxpayers will pay 12.5% in 2018/2019, 18.75% in 2019/2020 and 25% in 2020/2021.
Again, the numbers could be higher if the individual is pushed into a higher tax band or their personal allowance is tapered away.
Measures available?
JL: What are some of the steps they can take to reduce their tax bill and what are the considerations?
AB: Every case is different and will require tailored advice.
One option buy-to-let investors could consider is incorporation (transferring their properties to a limited company in exchange for shares) as the new restriction does not apply to companies.
Additionally, rates of Corporation Tax (currently 19% and moving to 17%) are lower than income tax (which is 20%, 40% and 45%, depending on the tax bracket).
Incorporation can, in some circumstances, be achieved without triggering Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT).
However, the default position is that the properties are transferred into the company at market value and will trigger a disposal for CGT and a purchase at market value for SDLT.
Investors could also consider forming a limited liability partnership (LLP) with a limited company and the corporate partner’s profit share would not be subject to the interest relief restriction rules.
However, the mixed partnership rules severely limit the profit allocation which can be attributed to the corporate member, so the effectiveness of this is hampered.
JL: It seems clear that, while there are some well-publicised options for buy-to-let investors, the best approach will depend on their individual circumstances.
There is therefore an important role for specialist property tax advice and, for brokers, now is the time – if you haven’t done so already – to establish a referral relationship so you can be confident that your clients are best placed to weather the storm of increasing tax bills.
The AE3 Media team has joined a raft of industry fund raisers readying to sleep on the streets in support of charity End Youth Homelessness.
So far, 369 people have donated to the JustGiving pages, with 29 separate fundraising pages set up by the mortgage and mortgage advice industries with over £18,544.89 raised so far with two weeks to go.
There are over 70 businesses backing the campaign and over 1,000 people willing to sleep on the street around the UK to honour the homeless suffering on a daily basis.
In the latest industry update this morning, Mortgage Solutions emerged ninth on the fundraising leader board, with Paragon Bank, Newbury Building Society and Brightstar battling it out for the top spot.
Danielle Dennis, events manager at AE3 Media said: “We are all fortunate enough to have a roof over our heads, where some people sadly aren’t so lucky so I think this event is really important to raise awareness and money for such a worthwhile and important cause.”
So please dig deep and then a little deeper again and offer the Mortgage Solutions and Your Money team a message of support on our fundraising page for this incredible charity here.
Rob Jupp, CEO of Brightstar sparked the initiative after a Twitter exchange with Atom Bank’s Maria Harris and has played a large part in driving it on.
Click this link to donate.
This could trigger a conversation about whether they should consider holding their investment in a limited company, so what are the considerations?
Counting the cost of the changes
Historically, private landlords have been able to claim back the interest they paid on their buy-to-let mortgages on their income tax returns and landlords in the higher 40% and 45% tax brackets could also claim tax relief at this higher rate.
However, this tax relief is being phased out over the next four years and from April 2020 tax relief can only be reclaimed at the basic rate (20%).
On an example where a buy-to-let property worth £150,000 is rented out for £750 a month and owned by a private landlord in the 40% tax bracket, whose mortgage interest payments are £450 per month, this change could halve their annual profit from £2,160 to £1,080.
How does becoming a limited company make a difference?
Limited companies pay corporation tax, not income tax, and by April 2020 corporation tax rates will be just 17%.
Using the same example as above, the tax liability if the same buy-to-let property was owned by a limited company in 2020 would be much less, which could mean a profit of £2,988 – nearly three times as much as owning the property as an individual.
Things to consider
Owning a buy-to-let investment with a limited company may be more tax efficient, but there are a number of considerations.
Taking an income
When a limited company owns the properties, the limited company also owns the profits – so landlords will probably have to pay income tax on any money they’re paid by their limited company.
Limited companies, must keep accounts detailing all income and expenditure, and all purchases using company money must have a demonstrable benefit to the business.
Transferring ownership of the properties
When a landlord registers as a limited company, the company must have legal ownership of the properties in the portfolio.
They can’t simply transfer them – they must be sold by the landlord to the company, at the market rate.
As such, they may incur several costs in the process – including early repayment fees on any mortgage, capital gains tax, and stamp duty.
Selling a property
Limited companies don’t pay capital gains tax, but any increase in the value of a property is viewed as profit when the property is sold, with corporation tax due.
Most individuals liable to pay capital gains tax get an annual allowance, (£11,700 in the 2018/2019 tax year) and only pay on gains above this amount, whereas corporation tax is payable on the entire profit. Depending on the level of gain, it could therefore be more expensive to sell a property as a limited company than an individual.
The importance of specialist advice
These considerations demonstrate that every client and every investment is different, and a limited company may not necessarily be the best approach for everyone.
It’s important you understand your client’s individual circumstances and plans, and that you partner with a specialist tax adviser who will be able to talk through their individual position and liabilities.
Pepper announced the deal late on Friday with the lender acquiring Optimum Credit’s entire business, including a second charge loan book of more than £450m.
Cardiff-based Optimum Credit was launched in 2014 and is currently owned by Patron Capital, with the deal remaining subject to regulatory approval.
Pepper Money told Specialist Lending Solutions: “As part of the purchase, we will be reviewing options for how Optimum is incorporated within the Pepper family.
“All Pepper-owned businesses trade under the Pepper brand, so we expect Optimum will transition to a Pepper brand in time.”
Brokers welcome deal
Brilliant Solutions managing director Matthew Arena (pictured) said the deal was great news.
“Pepper excels in specialist lending but has seen fit to purchase an existing operation which shows an acknowledgement that secured loans requires a unique skill-set and distribution base,” he said.
“Pepper’s own expertise will only add to the existing Optimum business.”
This was echoed by Brightstar Financial CEO Rob Jupp, who agreed it was a positive move for the second charge market.
“Pepper has quickly established a leading brand in specialist first charge lending and has announced its exciting plans to become a bank,” he said.
“It’s one to watch for the future and it’s fantastic that it sees second charge mortgages as a core part of its proposition.”
Kevin Hindley, CEO of Fluent Money Group, added it had built a close relationship with the directors and staff of Optimum and was pleased with the news.
“Pepper Money’s purchase of the business will ensure that Optimum Credit will become an even more significant leader in the second charge sector.
“They have represented the second charge sector with distinction and the purchase is a testament to their dedication to what is best for the industry and their customers.”
