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The dust is settling on one of the more unexpected General Election results for many decades, but what does a clear Conservative majority mean for mortgage and housing policy in the UK and how might it affect you? Sellers and buyers alike have been sitting on their hands waiting for the Election to pass. Each group will now almost certainly spring into action; pent up demand is likely to ignite a flurry of activity which is great news for the market as a whole. An improvement in the number of people putting their property on the market, coupled with increasing wages and a continuing low interest rate environment, is good news for buyers, although Mortgage Market Review regulatory constraints will present a challenge to those trying to access mortgage finance.
At the same time, we believe that a conundrum is developing where the Government seems committed to boosting home ownership at the same time as the regulator (the Financial Conduct Authority) is expected to stop the housing market ‘overheating’ by strictly controlling lending criteria such as affordability.
The complex and conflicting pressures of renewed competition, rising house prices and increased regulation will mean that residential purchasers, remortgagers and buy to let investors will be in need of more support than ever in gaining access to competitive finance under the new Government. In particular, rising house prices may leave many first time buyers struggling to meet affordability criteria without expert guidance.
We look at each major Government policy, or opposition policy that will now not make it onto the statute books, in turn.
No Mansion Tax
The good news for all buyers of property over £2 million is that no Labour or Liberal Democrat element to the government means no Mansion Tax. The Labour party wanted to introduce a Mansion Tax of 1% on properties valued at £2m plus. 100,000 homes would have been expected to produce £1.2bn under Labour’s plans – that’s £12,000 per home on average. The Liberal Democrats had similar plans, with slightly different bandings. The Conservatives do not support a Mansion Tax and have no plans to introduce it.
No change in the ‘non-dom’ status
In the run-up to the General Election, the Labour party proposed to remove ‘non-dom’ status except for people who only come to the UK for a very short period. (Foreign domiciliaries, or ‘non-doms’, are people who live in the UK but whose permanent home for tax purposes (’domicile’) is considered to be elsewhere.) They are already taxed in full on their UK income and capital gains. But unlike other UK residents, they can opt to be taxed on the ‘remittance basis’, meaning that they are not taxed on their foreign income and capital gains unless they bring the proceeds into the UK.
No specific details were given by Labour but the proposed change did create uncertainty within what is a group of highly skilled, internationally mobile individuals living and working here for periods of time. If non-doms who currently pay a large amount of tax (the Daily Telegraph reports that non-doms paid £8.2 billion in income tax and National Insurance contributions alone in 2012–13) had left the country altogether, the change could have actually cost the Exchequer revenue, rather than generating extra.
Buy to Let mortgage market
Banning sub-letting clauses in tenancy agreements
One of the smaller sections within George Osborne’s first 2015 Budget highlights a change that could cause a problem for some landlords. The Government says it will ‘make it easier for individuals to sub-let a room through its intention to legislate to prevent the use of clauses in private fixed-term residential tenancy agreements that expressly rule out sub-letting…’
Our biggest concern on behalf of buy to let investors is that this will make it easier for tenants to let out the property or rent rooms to other tenants. It also raises the risk of ‘rent-to-rent’ fraud, where someone poses as a normal tenant in your property, then creates extra rooms and charges rent to other individuals at a much higher price than they are paying you, the landlord.
This damages the property’s profitability to you and puts you at risk of breaking the buy to let mortgage terms and conditions (for example, not letting to tenants on benefits and having maximum contract lengths) and it may invalidate any landlord insurance you have.
Taxation of Buy to Let Rental Income
The Conservatives have committed to raising the personal tax allowance from £10,500 to £12,500 in the next few years; this will have a positive impact on net rental income. However, these beneficial effects could be negated if the Government decides to tax rental income separately to normal income, a suggestion that has been made.
No new buy to let regulation
Unlike the Labour party, who as part of their manifesto proposed changes such as rent controls and a national landlord register, the Conservatives have no great desire to regulate the UK private rental sector. Lack of regulation makes life easier for landlords who have less bureaucracy and administration to deal with.
The changes proposed to Section 21 of the Housing Act, likely to come into force later this year, will make it easier to evict a tenant, although there still will be important restrictions on how and when an eviction notice can be given. Of course landlords must ensure that they don’t carry out their own eviction in an illegal manner and should always take advice from an expert in property law.
What should a buy to let landlord do now?
Regardless of which of these policies are implemented – and when – there are important steps landlords can take immediately to protect their investment and improve profitability. The most important step is to review their buy to let mortgage. Mortgaging a property gives better returns, as it cuts down the initial investment needed. However, this also means it is absolutely essential that landlords regularly review their mortgage deal.
Interest rates have never been lower, and this applies to BTL as well as residential mortgages. However, rates will eventually go up and when they do landlords must ensure that their rental income still covers their costs. Landlords can protect themselves from future rate rises by choosing into a fixed-rate deal, which may come with a higher initial interest rate than a tracker or a discounted variable rate but will guarantee the same monthly repayments for a fixed period of time regardless of what happens to the Bank of England Bank Rate (also known as the ‘base rate’) or lenders’ standard variable rates.
Residential mortgage market
Help to Buy
The equity loan Help to Buy scheme (where the Government lends you up to 20% of the cost of your home, priced up to £600,000, so you only need a 5% cash deposit) will now continue to 2020 under the Conservatives. In its first two years, the equity loan scheme has helped 47,018 people to buy a home with just a 5% deposit. (Source: Department of Communities and Local Government) This is against a background of 326,500 first time buyers getting onto the property ladder in 2014 alone (Source: The Halifax).
The scheme is supposed to provide an incentive for housebuilders to keep producing new homes by guaranteeing demand. But that hasn’t happened – it’s a problem of supply, not demand. Unless housebuilders can be encouraged to build more housing, one of the effects of the Help to Buy scheme will be to continue to fuel house price inflation, especially in the South East where demand is strong, even without any Government assistance. Of course, supply is also affected by existing property owners’ ability to move up the housing ladder; if people cannot afford to move up then they cannot afford to sell their own property, thus contributing to the bottleneck that currently exists within the property market.
The mortgage guarantee Help to Buy scheme (where the Government offers lenders the option to purchase a guarantee on mortgage loans) has ultimately proved unnecessary (other than to act as a catalyst) because lenders have launched their own 95% LTV mortgages: it is currently set to end in December 2016 and looks unlikely to be extended.
Help to Buy ISA
The new Help to Buy ISA is a popular move and will further assist first-time buyers in saving for a deposit, often the biggest barrier to becoming a homeowner. However, the different rules and timescales of the Help to Buy ISA, Help to Buy mortgage guarantee scheme and Help to Buy equity loan scheme are confusing to potential mortgage borrowers and they will need assistance from an independent mortgage expert to navigate this area.
200,000 new Starter Homes
The Starter Home scheme was promised by David Cameron to appeal to first time buyers: apparently it will provide 200,000 new homes at a 20% discount (although buyers would have to repay this if they sold within five years). The scheme is designed to encourage the development of brownfield sites. Housebuilders taking part in the scheme will not have to pay the usual fees to local authorities. But there has been no mention of maximum LTVs: for this scheme to be successful or even to compete with Help to Buy, 95% mortgage lending must be available.
Right to Buy
The Conservative party’s manifesto contained a plan to extend the Right to Buy scheme to social housing tenants, to provide an affordable route to home ownership. This policy requires councils to sell their most valuable 210,000 properties from their housing stock and its result will be that many more properties end up in the private rented sector, owned by private landlords instead of local authorities.