Franchise Article

The shockwaves from the global credit crunch are continuing to ripple through the mortgage market and it seems that lenders are withdrawing and changing products on an almost daily basis.  And as we’ve become accustomed to mortgages running alongside the Bank of England base rate, the fact that the last two percentage cuts have made virtually no impact at all on our repayments has come as something of a shock.  The lack of correlation is because rates at which banks lend to each other have fallen out of line with the Bank of England Base Rate.

A couple of weeks ago the last 90% loan to value UK buy-to-let mortgage product was withdrawn, and the maximum LTV currently available for any mortgage is 85%.  No one is clear how long this will continue to be the case, but PPP’s mortgage broker of choice, Andrew Stanway, is confident that 90% mortgages will once again become available when the turmoil in the credit market has abated. 

“Many lenders are seeking to eliminate novice investors from their client base by pulling products which this group tends to tap into. Such products include the immediate remortgage on new build property, where novice investors have been enticed by developers offering no money down deals. The developer gets a sale, usually at an inflated price and the investor thinks he is getting a bargain. These deals represent a huge risk to the lenders and that’s why they are clamping down on these types of transactions”

Another indicator of this move away from new build property is that there are only four or five lenders currently offering 85% LTV, most of the rest will only go to 60% and some, such as Capital Home Loans, won’t lend on new build at all.  The reason is that over recent years mortgage arrears on new build have hit record highs, available units have been considered overpriced, and it’s been almost impossible to determine their ‘true value’, so lenders have lost confidence in a market that has become stagnated, with an excess of supply over demand.

In Andrew Stanway’s opinion there is still money to be made in new build, but only if it’s a sizeable property that can be utilised as an executive multi-let.  He believes apartments have reached the end of their shelf life as a worthwhile pure investment and that the whole new build market will remain quiet for a couple of years, while existing stock stabilises and begins to increase once more in value.

In the short term these developments means that investors will simply have to accept a higher level of capital input when purchasing UK property, which does impacts adversely on returns.  However, we see this as a temporary cash flow issue and not a long term problem.  Our advice to PPP franchise partners and mentoring clients who are following our model for cash positive investing in the UK is to take out 85% buy to let mortgage products with no tie-ins or redemption penalties, so that as soon as 90% buy to let mortgages once again become available, the capital can be extracted and re-utilised.

On a positive note, we are finding that surveyors around the country are becoming more bullish with their post-refurbishment valuations, and more and more willing to re-value property after refurbishment on a part residential and part commercial basis.  The result is post-refurbishment valuations that are significantly higher than a comparable residential property value, and some of our clients are finding that although they have to invest more capital at the start, they are still able to pull out most, if not all of it a few months down the line.

The mortgage market should pick up, but it is having a tough time at the moment.  For now, don’t be too quick to jump at special offers and developers’ discounts, take the time to do careful research on figures, and just be prepared to inject a little more capital into the deal in the short to medium term, while mortgage lenders regain their confidence.