How is the housing market going to be affected by Brexit? A number of pundits are saying that it has already affected the market. It is true that the market currently has slowed down but I do not think that Brexit is the main cause.
Sure, job uncertainty plays a part. If your company is part of a multinational or has close import or export links with EU countries, then uncertainty is a fair emotion to have and will affect your decision to move to a new house. However, this can only be true if you are were thinking of moving up market and increasing your level of debt. You are doing the reverse and downsizing then you would be improving your position; you are likely to be reducing debt and so Brexit shouldn’t affect. In fact, Brexit should therefore have a positive influence on house prices in that sector of the housing market. Logically then, Brexit should have a mixed influence
I think that the real main cause is not Brexit or employment uncertainty but is a Bank of England policy which does not have a political hue. There are two factors:
- Actions by the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) and Her Majesty’s Revenue and Customs (HMRC), and The Treasury acting in concert to slow down the BTL market, which had been seen to be inflating the housing market due to the fact that BTL mortgages were quite easy to obtain
- The FCA action to reduce the mortgages sizes available on residential owner occupier mortgages.
In the case of BTL, 4 changes over the last few years are making the purchase less attractive. These changes have without a doubt been successful. It is a vindication of this success that we see BTL mortgage interest rates at their lowest ever, which can only be a reaction by lenders to falling business volumes. Historically, the margin between the interest rate charged on a residential mortgage and that charged on a BTL was in excess of 2%; now it is 0.25%. Has the BTL market slowed down? – a resounding yes.
So, what were those 4 measures
- The changes in taxation of cost of finance. Much has been made of this, and much of it is also misinformation. The cost of finance remains an allowable cost; the change is how HMRC allows it. The consequence is that basic rate tax payers are unaffected whereas there is an affect on higher rate tax payers. Note though, that even higher rate tax payers get some allowance. This has driven many people either to change to owning their BTL in a limited company or buying in the company in the first place. It is my view that this is a very dangerous strategy. Whereas taxation of a limited company does get a full allowance on cost of finance, if anyone thinks that HMRC are stupid, and that they are going to allow this easy loophole, that would be very foolish. There will be many people putting BTLs into a limited company which HMRC does not believe is truly trading limited company and as such will not apply the allowance on finance costs
- The increase in Stamp Duty Land Tax (SDLT) on second homes or investment properties. There is an extra 3% paid on top of the exist band rate. This measure applies to all second homes and investment properties, so both BTL and FHL (Furnished Holiday Let). If the new purchase is to replace your main residence, then the extra SDLT paid is refunded to you on sale of your existing main residence.
- The increased safety margins that lenders must allow on how the rent covers the monthly mortgage. Mortgage lenders have always put a safety margin calculation into their underwriting for BTL mortgages. That safety margin has now increased by approximately 30%. The effect is that the mortgage obtainable for a given rent has just become 30% smaller meaning that you will need to make up the shortfall with a larger personal deposit. You may not have the extra deposit in the first place, or you may be unwilling to invest that extra sum.
- The extra underwriting required for a portfolio landlord. If you have 4 or more properties mortgaged or not but not including your main residence, the lender you are approaching for a new mortgage, be it new purchase or remortgage, is required by the PRA to ask you for considerable details about them and to produce regular annual reports. You may ask why and, surely, they know this information already. The fact is that they do not have this information easily at a hand. Many lenders are not willing to collect this and to report on it and have stopped lending to portfolio landlords. Others are using it to determine whether you are mortgage-worthy. Whatever the reason, I is now quite difficult to obtain a mortgage if our area a portfolio landlord.
In the case of the FCA measures on residential mortgages, there has been a review of affordability. Whereas a few years ago the “directive” to lenders was that a crude calculation of 5 times earned income would result in a mortgage which was affordable to borrowers. This has now crept down to 4 times earned income. With wages very much static the effect has to be a slowdown in house price increases and actually reduction in house prices. But the more important consequence is that there are now many people who would not qualify for their existing level of mortgage were they to apply today, let alone if they wanted to move and increase loan size. So, you have to ask, “if I can’t even have my existing level of mortgage, am I going to move willingly to a smaller house where I do qualify for a mortgage?” – I doubt it. Thus, the market is going to be very stagnant.
But it actually gets worse than this. Only in early April 2019 have the FCA recognised that there are many people paying a high interest rate on their mortgages with their current lenders but cannot move to other lenders in search of lower interest rates because they cannot qualify for even their current level of mortgage. The FCA are easing their stance on this are suggesting that provided borrowers do a £ for £ remortgage, then some leeway is allowable of affordability income multiples. Let’s see if this happens in practice. Lenders will not want to incur the wrath of the FCA if they do it wrong, so it could be that they choose not to do it at all.