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Barriers to home ownership

Barriers to home ownership

The plight of first-time buyers has been a matter of concern for some time now. With COVID19 restrictions ongoing and Brexit around the corner, it looks like life could be about to get even tougher for (potential) first-time buyers. Here are some of the challenges they may face – and what might be done to help them.

Raising a deposit

Back in 2017, Lifetime ISAs were introduced to help people save either for their first home or for a pension (or both). In response to the impact of the Coronavirus pandemic, the government changed the rules on Lifetime ISAs to allow borrowers to withdraw funds without an active penalty. In other words, borrowers lost the government bonus but did not have to pay the 5% withdrawal fee.

Once the UK has established a post-COVID19 “new normal” (and possibly after Brexit if that is later), it might be feasible to reassess the Lifetime ISA situation and see if there is any way to use it to help undo the damage of the pandemic (and, if relevant, Brexit).

At the very least, the government could look at ways to make it possible for people to “get back where they were”, even if they can’t afford to replace the money they withdrew during this financial year. It may even be possible for the government to increase the savings limits (and corresponding bonus) and/or the length of time over which first-time buyers can save.

Satisfying the affordability criteria

The Mortgage Market Review obligated lenders to stop making lending decisions purely on headline data such as income and, instead, to look in more detail at a potential borrower’s ability to afford the loan in their personal circumstances. Making this work in practice requires being able to make reasonable predictions about what the future is likely to hold for the person in question. This could be extremely challenging in a post-COVID19/peri-Brexit environment.

On the one hand, nobody wants to see a return of the behaviours which led to 2008. On the other hand, nobody wants to see buyers, especially first-time buyers, frozen out of the market due to lenders being unable to offer them any flexibility in case they wind up on the wrong side of the FCA. Again, this looks like an area where parliament could potentially assist.

The government has already extended the Help to Buy Equity Loan scheme albeit only for first-time buyers. This could possibly be expanded further, albeit with appropriate caution. For example, the rules could be adjusted to allow for the purchase of existing properties. This could open up some interesting opportunities for first-time buyers such as the option to take on former investment properties, perhaps even the homes they are currently renting, or even to buy properties in need of refurbishment.

Dealing with the fear of a market downturn

Buyers, especially first-time buyers, may be wary of buying into the property market in the near future for fear that the property market will be hit by a slump or, even worse, by a crash. While these fears are understandable, they are also a sign that buyers need to be educated about the realities of property purchase.

In particular, property professionals need to ensure that buyers are clear about the fact that property should be seen as a long-term investment purchase rather than a short-term impulse buy. They should expect periodic fluctuations in the market, including occasional, sharp, downturns, and be prepared to ride them out.

This may involve working with the broader financial services industry and maybe even the government to ensure that first-time buyers have the necessary financial education to understand the financial practicalities of home-ownership.

Your property may be repossessed if you do not keep up repayments on your mortgage.

For Investments we act as introducers only.

The FCA does not regulate some forms of Buy to let Mortgages.

The basics of buy-to-let finance

The basics of buy-to-let finance

The arrival of the 2020 financial year will spell the end of what remains of mortgage interest tax relief.  Although this won’t be exactly news to buy-to-let landlords, it has been in the process of disappearing since April 2017, it may be a useful prompt to buy-to-let landlords to review their finances and make sure they have the right financial products for their situation.

Mortgages

Traditionally, repayment mortgages have been the more expensive option for landlords, but hey offered the benefit of allowing a landlord to build up real equity in their portfolio and, ultimately, to end up owning the property in its entirety.  Interest-only mortgages, by contrast, were more affordable and allowed landlords to maximize yield, thus increasing their income for the duration of the mortgage.  The abolition of tax relief on mortgage interest may, however, have changed this subtly.  The reason for this is that as a repayment mortgage progresses, the borrower pays less and less in interest and more and more of their repayments go towards the capital.  With an interest-only mortgage, however, the capital is never repaid (or at least not until the end of the mortgage), which means that the borrower continues to pay interest at the same rate throughout the course of the mortgage.  In the old days, this was largely irrelevant, as mortgage interest could be set against tax, but now that the old system of tax relief has now been replaced by a system of flat-rate tax credit, landlords could find that the difference is meaningful even without the benefit of building up equity.  As always, people need to do their own sums, but it is definitely worth checking.

Insurance for your property

In addition to taking out standard insurance on the fabric of the building, landlords may want to consider whether or not they want to cover the contents.  Even if the property is let unfurnished, it will presumably have at least a kitchen and a bathroom and these can be expensive to replace if your tenants leave them damaged.  They can also cause expensive damage to your tenants’ property if they malfunction, for example, if a washing machine springs a leak, so you might also want to consider protecting yourself against that.  Finally, although this is not, technically, protecting your property, you might want to take out insurance against loss of income from it, be it through non-payment or through voids.

Insurance for yourself

Harsh as this may sound, protecting your property starts with good tenant selection.  There is simply no two ways about this.  There is, however, a potential complication in that landlords need to select tenants in a way which complies with the law, in particular the Equality Act 2010.  This may seem self-evident, but it can be surprisingly easy to act in a way which may be considered discriminatory, or at least perceived as discriminatory by a potential tenant, especially if a landlord is nervous about falling foul of the “Right-to-Rent” rules.  Lettings agents may be useful here, but if landlords choose not to use them (or even if they do), it may be advisable to take out some form of legal expense insurance for landlords.  This may also be useful if landlords have to deal with problem tenants.  Last, but by no means least, landlords may wish to think about insuring their own health, especially if they are active in the management of their portfolio (as opposed to leaving it to lettings agents).

A final point

If you are using a financial product for a buy-to-let property, then you must take out products which are intended for that market, not products for the residential market.

 

Your property may be repossessed if you do not keep up repayments on your mortgage.

The FCA does not regulate some forms of buy to let mortgages. 

 The FCA does not regulate letting agents and we act as introducers for them.

 

A beginner’s guide to property investment

A beginner’s guide to property investment

If you’ve been paying attention to the financial news, you’ll probably have noticed that there have been numerous articles highlighting the increasing challenges faced by property investors in general and buy-to-let property investors in particular.  The fact still remains, however, that the UK has a high demand for property and especially for high-quality rental property.  This means that there are still very respectable profits available to astute property investors who operate in the right way.  If that sounds like something which would interest you, then here is a beginner’s guide to property investment.

It’s not just an old joke, location really does matter

If you’re planning on managing a property yourself, then you’re probably going to want to look for properties which are within practical travelling distance of where you live.  These days, however, property investors, especially beginners, might want to give serious consideration to using a lettings agent to ensure that every aspect of their buy-to-let business is managed in total compliance with the law.  This does add to costs, but it also means that investors can look at a far greater range of locations since they will not need to travel to them personally (or at least not often).

Teamwork makes the dream work

For “hands-on” investors, having an address book full of useful contacts (such as reliable and proficient tradespeople) can make life go so much more smoothly.  For “hands-off” investors, a good lettings agent can be more than worth their fee.  In either case, having an accountant on board is not just a convenience from the point of view of managing your tax returns with minimal hassle, but an investment from the point of view of minimizing the amount of tax you have to pay.  You may also want to have a lawyer on your side, particularly if you are a “hands-on” investor.  As previously mentioned, the UK buy-to-let market is becoming increasingly regulated and penalties for non-compliance, even inadvertent non-compliance, can be very severe.  You might also want to consider becoming a member of relevant associations and other networks as a handy way of keeping on top of developments in the property market and of benefitting from other people’s experience.

Make sure your portfolio is built on solid foundations

A rising tide floats all boats and a rising property market effectively gives property investors some leeway to make mistakes and escape unscathed (or with very little damage done to them).  When the property market is stagnant or falling, property investors need to tread more warily.  This has always been the case but recent developments have made it even more important that investors get their sums absolutely correct right from the off.  In this context, there are two changes which are of particular note.  The first is that Mortgage Tax Relief is in the process of being abolished, which could have significant implications for investors on higher incomes.  One way to deal with this is to hold property within a limited company, however, this carries a number of implications which need to be clearly understood before a property investor can make an informed decision as to whether or not this is the right approach for them.  It’s also worth noting that if you are a new property investor and choose to go down this road, you almost certainly want to buy your property through the company right from the start to avoid the costs of transferring it into the company further down the line.  Secondly, the government has now finally banned landlords charging additional fees to tenants, which means that it is now utterly vital that property investors have a clear view of all the expenses they can reasonably be expected to incur (and ideally a margin of safety) so that these can be incorporated into the rent tenants pay.

Your property may be repossessed if you do not keep up repayments on your mortgage.

The FCA does not regulate some forms of buy to let mortgages.

The FCA does not regulate tax planning and we act as an introducer for it.