Last year saw new government levies and the discontinuation of valuable tax reliefs push landlords right to edge of breaking point. The move was intended to choke off demand in the sector to give more space in the market for first-time buyers. The unpopular decisions were made by former chancellor George Osborne, who added a new 3% stamp duty surcharge on buy-to-let purchases from April of this year. While cutting tax relief on rental income and maintenance costs, he also planned to cut tax relief on mortgage interest. These moves have obviously enraged landlords, who require high levels of debt to make purchases happen.
Many landlords have taken the initiative to look further afield to maximise their profits, searching out properties in lower value locations. Manchester tops a list of postcode areas across England and Wales where rental returns are the most profitable for landlords. Lenders typically offer loans of no more than 75% of the property value. The Interest Coverage Ratio (ICR) is typically 125%, which is the relationship between the monthly rental income a property generates, and the costs of servicing the mortgage. Despite interest rates being at historic lows, the ICR is usually calculated using a higher rate or ‘stressed’ interest rate, which ensures a sufficient financial buffer to withstand any interest rate shocks, or when the property is untenanted.
Recently, lenders such as Nationwide and Barclays have decided to move the ICR from 125% to 145% to ensure that borrower’s monthly rent will cover 145% of the interest payments. This means that buyers will need to provide a bigger deposit upon purchase. Alternatively, if they are not willing to put up a larger deposit, they could continue to maximise their leverage by choosing a loan-to-value ratio of 75%, but they will have far fewer properties to choose from.
Research for the Financial Times by Richard Donnell, Research Director at housing market analysts Hometrack, showed that with this shift in the ICR to 145% at stress rates of both 4.5% and 5.5% considerably shrinks the number of boroughs where the figures will add up.
Donnell considered the buy-to-let favourite: a two-bed property, in every local authority in England. He found that with the ICR at 145% with a stressed interest rate of 4.5%, the number of local authorities where a purchase at a loan-to-value ratio of 75% is achievable nearly halves, from 320 areas to just 181 areas. Furthermore, with a stressed interest rate of 5.5% it means that there are just 50 local authorities where it would be possible, with average local rents and prices to borrow with a 75% mortgage. Most of these 50 authorities are in the North of England.
A Northern property investment group that specialises in buy-to-let has seen a 5% increase in enquiries and 12.4% increase in sales in July, following the shock Brexit result. The London and Southern region of the UK were already beginning to slow pre-Brexit, but in the North, landlords have realised that there are excellent opportunities to be had. With entry property prices as low as £75,000 for a one-bed apartment, it means that capital growth is still attainable.
Manchester and other key northern cities still boast healthy growth and prospects with many housing projects as well as retail and commercial projects going ahead, despite Brexit, the northern region is still pushing forward to meet demand. Significant projects in the area include the announcement of plans to double Salford’s Media City UK towards the west of Manchester City Centre, a host of new skyscrapers for the centre, and expansion plans for Manchester’s Citylabs biomedical research centre.
Anderton Gables has been helping landlords and tenants across the northern region of England for many years. With its team of experts coming from a wide range of backgrounds, they offer a wide variety of commercial building surveying services as well as project and development consultancy. Concentrating their expertise within the region allows them to have a solid understanding of the area. Anderton Gables offers a wide range of services including pre-lease building assessments, building surveys and planning and building regulations.
Jonathan Shaw, Partner at Anderton Gables, said:
“After the Brexit decision was announced, we as a region have taken the decision by the horns and are embracing the changes. We see it as an opportunity for property investors, with house prices expected to soften it may put off would-be buyers, but yet they still need somewhere to live, which is excellent news for landlords. If house prices are to cool, then property investments will be more attractive.”
For more information about Anderton Gables commercial property services visit: www.andertongables.co.uk