Beware - Lenders Stealing Equity...

[Simon Dewsberry]

Hi All

Being a LL, BTLer, Prop investor ...etc has never been easy, despite the opinion of most outside the game...

The latest concern is the direction in which the lenders are going...

Now as interest rates rise - rent/mortgage ratio as we all know is getting very difficult to meet. We must collect enough rent to cover mortgage and cover costs and hopefully produce some profit for our risk, time and trouble.

Now here is the problem

As Interest rates rise our mortgage amount increases as does the "homeowner's" mortgage. The Tenant is protected or shielded from this by the fact that the LL is restricted from immediately "tracking" the rate increase by rent control rules,market competition and AST's and so cannot reflect the cost on the rent immediately.

Now consider that as the interest rate is higher - for the LL to borrow, he needs to show a sufficient rental income. Logically as mort payments increase rent should increase in line to cover them..

If not, Lender cannot lend, LL cannot purchase - this is clearly a problem to both Lender and LL- the Lenders have found an ingenious way of "solving this problem"

Clearly lenders need to make a profit . As rate is now 5.5% we as LL pay from around 5%- 7% on the various deals offered - now, up until fairly recently, set up fees for these deals ranged from cash backs, to a few hundred pounds, but we are seeing a massive shift towards hugh fees of 1.5% to 2.5% on 2-3 year deals -

If you look at this sensibly what they are saying is this :

The prop you wish to purchase/refinance is not acheiving enough rent for you to make the loan payment each month at a rate of around 6.5-7.5% (what we are actually going to charge you) so what we are going to do is charge you the extra 1.5-2.5% upfront -If you cant afford the £2000-£5000 pound fee -dont worry we'll add it to the loan (and charge you interest on it for the next 25 years and make even more money out of you !) but reduce the monthly payment so that you can collect enough money to cover it.

Now in 2-3 years time when your discounted/fixed deal has expired you will have the choice of paying std variable (which almost certainly will be a higher amount than the rent you are getting (so leaving you making a Rental loss each year )

Or you may kid yourself that this is actually a profit and hand over a further 2% of your portfolio in order to maintain a viable mort/rent ratio. If this repeated over the next 10 - 20 years you will have given the lender 10- 20% of your property value (loan value) which in reality is approaching one half of your equity growth -(based on average long term eq growth of 5% pa)

THIS IS SERIOUS STUFF

Also consider that you will be parting with 40% Cap Gains as well - and your pension, all of a sudden, is not going to be any where near what you thought ...........In fact, with in going stamp duty, ins, energy reports, gas checks, voids , hmo regs and licenses, bond insurances, cap gains, refinance fees, sol fees, renovation costs, repair costs, admin, advertising, agent fees, bed debt .............plus more .......it is becoming financially impossible to make this work any longer.

THE FACT IS THAT THIS SITUATION IS SELF PERPETUATING AS IT IS ARTIFICIALLY KEEPING RENTS DOWN IN ORDER THAT LENDERS CAN KEEP ON LENDING -

If the correct(real) interest rate was applied to monthly payments (instead of bi annual "equity snatches" ,then rents would have to increase in order for both LL and Lender to stay in the game - LL are now being forced into a very tight corner and are subsiding a national rent rise with their equity - without this mechanism the btl market is effectively halted in its tracks.

NOT JUST NEW PURCHASES - ALL BTL PROP THAT IS DUE FOR REFINANCING ....

The open public price "crash" ,as we had in the 90's - with LL not covering mort payments and selling up so drivng the crash further, is being very cleverly concealed by LL handing over chunks of equity to lenders.

Wont happen to you ........????

Have a look when your mort "deal ends" ...can you run the prop with mort on std var rate ?... if not be prepared to hand over around 2% of the val of loan....and again in 2-3 years....(to refinance to continue..)

Now we could say that if values dropped then we can wait for them to recover at a later date and it is not a real loss unless you actually "sell" the prop, just a tempory loss on paper --the problem here is that the value is irrelevant - you are going to lose this money in very real terms regardless - when the prop price drops as well you are going to lose it again .............

The bigger your portfolio the more this is going to hurt - i reckon this will cost me around 80-100k every 2 years - just in refince "set up fees".......(if all lenders follow suit)

Advice: any further purchases MUST have massive equity potential in order for the investment to suceed, as at present the best you will acheive in real terms, on rental return, is to break even.......ie development, extension, multiple income from single prop, splitting etc(see my other posts)

The market controls for rent increases have effectively been replaced by theft of equity in my opinion - and as the interest rate continues to rise -the chunks of "equity theft or snatching" will get bigger(higher mort set up fees)

Desperation to at least get some inflow will also keep rents low...(as they already are...!)

If we were all paying the "proper" monthly rent - then a dramatic rent increase would occur ....or a spectacular market freefall back to prices which accomodate todays afforable rent figs. Which in reality, as per usual, will fall lower as interest rates go higher ...This must happen for the equaton to work for LL and lender .....

If rates go higher LL are going to get battered........This whole artificial situation cannot be sustained and I for one will be very happy when the market price correction takes place and they leave the interest rate alone - the BTL market in general is Fxxxxd at the moment and this is the lenders way of staying in business.....unfortunately that keeps the market going and interest rates rising -fees rising - LL keep buying and so on -this time bomb will have to go bang soon = the problem being that most LL have not realised they have a "tealeaf on the team" and are still buying without du consideration...

"i'm not investing at the moment" isn't going to help either as what you have already got is about to be attacked in a way you probably never considered........

Unfortunately this situation is not taken into acc for inflation purposes - If it was, the interest rates would not be going any higher, on the back of what really should be about a 20% rent increase accross the board.

Just a few thoughts i had earlier whilst driving home ...........................

Apply these thoughts to your portfolio and tell me your thoughts ...

hhhhhmmmmmmmmmmmmmmmmm..............................

The good news............There are still props out there you can make money on .......just be aware and look a little harder....

Simon

[J4L]

ALL those thoughts whilst driving home??

Where'd ya been?? France??

lol

[russ295]

hi simon,

this has been bouncing about my head for a few weeks, never had a chance to sit down and work it all out, it may be better to take a higher rate and have no costs, instead of giving away your investment, me for one, i hate banks etc, (long story) the more you need them, the more they screw you.

when you cost say £2k over 2 years, its £83 a month, plus set up fees etc,

its all a bit daunting!!

russ

[Melboy]

Aaaaah! Nice too see your on a learning curve Simon

Us older (but not necessarily wiser) property Landlords are well aware of what you have just stated and adjust accordingly.

In the mid 90's when IR's were a little higher than they are now it was very difficult to get a BTL mortgage,not impossible though,and when you could get the BTL mortgage higher rates applied and expensive penalty clauses and set up fee's which were outrageous for the time which is why there were in real terms a shortage of renting type properties available (and Gordon Brown was yet to plunder the Company Pension Schemes!).

It was always on the cards that tax relief on the interest paid on a BTL mortgage would become a non deductable item and this topic has been talked about for years and years by Government and the main reason for not removing it is because it would have seriously affected a lot of Politicians in Post and so it was put on the back burner......until now!

The Politicians have sorted out all their allowances and payrises including pensions etc. so it will not come as too much of a blow to them as it will to Joe Public when the tax relief on interest is removed and the Treasury make another pile of money (saved).

There are plenty of cash buyers for property out there who do not rely on Mortgages etc. to build their portfolio and I modestly put myself forward on that score

I am just waiting and watching

Mel.

[Simon Dewsberry]

ALL those thoughts whilst driving home??

A lot of script to explain a very simple concept "have you ever considered - being tied down, gagged, and Fxxxxxd up the Axxx" cos that is effectively about the score.......

If they do remove BTL Tax Relief there is going to be "the mother of all auctions"

Lenders exposure to risk is increasing by approx 2% which on round 1 they do (by letting you add the fee to the loan) when prices start to fall their exposure is goig to be much greater in % terms so refinancing is going to require a massive cash payment in order to facilitate............and to get the figs right ,,,,,

Simon

[lauralivesartnouveau]

Hi Simon

The good news of course is that the B2L investor can shop around and get the deal that works for him/her and its your choice on whether to proceed…. Or not

I personally follow two basic rules

Firstly I go for the longest fixed rate possible preferably 5 years

Secondly on purchasing a new property I ensure that the figures stack up so each property stands up on its own with a margin including the further advance for the deposit.

This though adds to additional pressure on future rental inflation

Oliver

[Simon Dewsberry]

Hi Oliver

"This though adds to additional pressure on future rental inflation"

and there lies the problem ...........

We're not all going to go bankrupt - the next 2 years are going to be very interesting, as people come off deals and begin to realise that they are effectively subsidising what should be a rent increase, which in turn as it is not happening, is stopping a natural market correction and hence artificially driving both prices and rates higher - the higher we go the further we will have to fall............

The risk factor is rising rapidly and investment strategy should be much more carefully scrutinised.....

[J4L]

I think we should all be trying to increase rents a little, dunno how we will fare with the rent review boards but I think it needs doing by everyone.

This should help drive prices closer to what they should really be.

[Simon Dewsberry]

Great theory - but LL with empty props are going to still carry on taking the best offer they can get to try to cover mortgage pymts - and whilst these are artificially low - i see no movement in rent prices for sometime ..............

Simon

[J4L]

with respect Simon it's these LL's who 'give in' that drive the market down.

Admittedly they are under pressure to fill the property but if they just slung £50 on and waited they would benefit in the long run.

I've just spoken to a LL who is wanting £750/mth for a propertty that in my honest opinion is worth no more then £650/mth. He'd rather get the right price, or right people, than just let it to anyone and is prepared for voids. That's his choice, and all i can do as an agent is advise. Problem here is that he owns the property rather than needing to fulfill a mortgage payment so it's easier to calll the shots.

Personally, i think he's right in holding off but there are too many people trying to 'capture' the market and make a quick buk, this is where the deep problem lies.