Interest Rates and BTL Mortgages

  • Interest rates held for the time being
  • Bank of England signalling gradual rate rises
  • Higher rates may affect landlords’ profitability
  • BTL mortgage rates low and still falling
  • Worth considering locking into a fixed BTL mortgage deal

On 3rd August, the Bank of England’s Monetary Policy Committee (MPC) met to decide the UK’s base rate of interest. Once again, it voted to keep the rate at its current historic low of 0.25%.

The decision came as little surprise to many forecasters who  pointed to a sluggish economy and the continuing economic uncertainties arising from Brexit – neither of which, they argued, would benefit from an increase in the cost of borrowing. Britain’s GDP growth slowed to 0.3% in the second quarter of 2017, and this news will have featured prominently in the MPC’s discussions. Businesses generally need credit to fuel their expansion, so to have raised interest rates would have risked curtailing economic growth at a time when Britain is already floundering at the bottom of the table of G7 economies.

The MPC members will doubtless have been aware that a rate rise would also further damage a housing market that has been hard hit by problems of affordability. Consumer borrowing is already approaching a record high and to raise interest rates now would likely put further pressure on prospective homebuyers.

Nevertheless, the vote was not unanimous; it was split 6 to 2. Partly, the pressure to raise rates arises from the need to keep inflation in check – something the MPC has failed to do in recent months. This pressure was alleviated a little in June when inflation was lower than forecast (2.6% rather than 2.9% the previous month) but the rising cost of living is still very much in the Committee’s sights, as the minutes of the meeting reveal.

The minutes state: In the MPC’s central forecast, GDP growth remains sluggish in the near-term as the squeeze on households real incomes continues to weigh on consumption… The MPC expects inflation to rise further in coming months and to peak around 3% in October, as the past depreciation of sterling continues to pass through to consumer prices. Conditional on the current market yield curve, inflation is projected to remain above the target throughout the forecast period. This overshoot reflects entirely the effects of the (Brexit) referendum-related falls in sterling.

Given that the Bank of England evidently has little confidence that inflation will fall back in line with its 2% target, there seems a growing likelihood that the MPC will eventually raise interest rates. However, Mark Carney has signalled that should it do so, the process would be slow and incremental. The report’s summary stated: “All members agreed that any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.”

The Committee also appeared to acknowledge the limitations of using interest rates to control inflation, saying: “attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth.” In short, there seems little appetite for risk, given the shakiness of the domestic economy.

 

Responding to the announcement – which came with a warning that “monetary policy could need to be tightened by a somewhat greater extent” than markets had previously been expecting – the National Institute of Economic and Social Research revised its predictions, concluding that a rate rise was now more likely to occur in the first three months of 2018, rather than in 2019 as it had previously suggested.

Implications of a rate rise:

If and when the base rate rises, borrowers will almost inevitably see an increase in costs. Businesses will see a rise in the cost of credit and consumers will feel the pinch on everything from mortgages to credit card repayments.

The MPC will therefore be careful about the speed at which it increases the base rate. The Bank of England has already recognised that consumer credit has become a cause for concern, with the value of outstanding loans on cars, credit cards and other personal debts rising by 10% over the past 12 months. This compares against average incomes, which have risen by only 1.5% over the same period – less than the rate of inflation. The Financial Conduct Authority recently reported that 2.2 million borrowers are now in financial distress, despite the low cost of borrowing, so to add to people’s costs at such a time would inevitably increase the risks of hardship and repossessions. A “slow and steady” approach by the MPC therefore seems wholly understandable.

Interest and mortgages:

Of course, any rate rise is going to be unwelcome news to landlords who have already had to contend with a number of tax-based assaults on their profits. Now, however, property investors can insulate themselves against the effects of an increase by taking advantage of some very hospitable conditions within the buy-to-let mortgage market.

At the start of the year, there was a pronounced drop in the number of BTL mortgage products available to investors,  but lenders have since found a new confidence and competition is once again fierce.

On 31st July, Moneyfacts published the results of its own independent research, noting: “BTL mortgage competition is showing no signs of stopping, which is great news for landlords looking to build their portfolio. Our research shows that the average two-year fixed BTL mortgage rate has fallen by 0.31% in just one year, and even though the pace of the fall has slowed in recent months… the continued drop is nonetheless welcome.

“The figures also show that the market has now recovered from the significant drop in products that was seen at the start of this year, suggesting that landlords can benefit not only from low rates, but also a higher number of mortgages to choose from.”

More intense competition is certainly helpful for any investors looking to lock in to a good deal while rates are still at their all-time lows. 2 and 5-year deals are now being offered that offer investors considerable confidence that mortgage repayment costs will remain both predictable and manageable.

Changes in September:

While now might be a good time to consider new mortgage products, investors should note that new regulations will come into effect from 30th September. These will require lenders to apply stricter affordability checks on applicants with four or more properties. Previously, lenders of BTL mortgages sought to ascertain an applicant’s ability to pay by demanding proof that rent would cover 125% of proposed mortgage interest payments, assuming a hypothetical interest rate of 5.5%. As of the end of next month, that figure will rise to 145%. Currently, there are major lenders still offering new BTL mortgages according to the old criteria but it remains to be seen how long these will remain available.

Commenting on the changes, Charlotte Nelson, finance expert at moneyfacts.co.uk said: “Given that 89% of the mortgage deals on the market today are available for borrowers with four or more properties in their portfolio, these changes will affect a large chunk of the market.”

Looking ahead:

What is certain for all investors is that good information and advice will remain key to making a success of property. The BTL market itself still offers considerable benefits over conventional savings accounts, and the prospect of steady yields and capital appreciation generally make for a safer, less volatile investment than stocks and shares.

However, not every property deal will be a winner; location is key, so it’s essential to choose the right property in the right area, aimed at the right kinds of tenant. Add to that the importance of choosing the most appropriate financial package and one can quickly appreciate the wisdom of seeking expert professional advice.

If you’d like any information or help with finding a property that’s right for you, please contact one of our advisers today on 01244 343 355 or email info@residential-estates.co.uk

Choosing Chester

 

As a Chester based property specialist, we naturally have a keen appreciation of the market conditions prevailing within one of Britain’s most historic cities. In the course of our work, we routinely help clients to buy and sell homes here, to find quality rented accommodation and, of course, to make profitable, well informed investments.

In this article, we thought we’d explain what makes Chester’s property market so special.

First, of course, there are the aesthetic considerations. Anyone who has even a passing acquaintance with the city will be familiar with its beauty, its character and its rich history. Just say the name and images of ancient walls and half-timbered buildings spring unbidden to mind. Visitors and residents alike will understand why it regularly makes the top listings of foreign visitors’ favourite city destinations. Home to roman ruins and one of the country’s best loved race courses, it has a thriving tourist economy that seems to grow stronger every year.

But an extensive count of such familiar strengths is essentially unnecessary; as a gem of British heritage, as one of the region’s leading tourist attractions, Chester is already widely renowned. Most readers won’t require a long list of superlatives in order to appreciate that the city is a unique and bewitching place to live. Numerous surveys and ‘quality of life’ indices would certainly support that view.

Looking beyond the immediate doorstep appeal of a typical city home, what else separates Chester properties from those in other regions? Beautiful and desirable the location may be, but does it make sound financial sense to relocate or invest here?

 

The Economic Argument:

In answering that question it is worth examining the economic health of the region. Any prospective homeowner or tenant will doubtless want to know how the city is likely to fare in the challenging years ahead; whether neighbourhoods will continue to prosper; whether Chester is capable of sustaining the same enviable quality of life it offers today.

Happily, all the indications are good. Local business conditions are healthy, buoyed by a number of large, well established employers, and the region is attracting considerable volumes of new investment from both the public and private sectors.

Despite its evident history, Chester is not a city wedded to the past. It is home to many forward-focused businesses and it affords a base for workers engaged in some of the UK’s most advanced industries. It boasts a thriving financial sector – sustained by major players such as Bank of America, HBOS, Virgin Money and Marks & Spencer Money – and it has always benefited from its well established chemical, pharmaceutical, automotive and manufacturing sectors. This is an impressive feat for a moderately small city with only around 118,000 inhabitants.

One particular growth sector is advanced manufacturing. A relatively recent development has been the creation of a large Airbus UK factory in Broughton. The facility is responsible for the production of Airbus A380 wings and now sustains around six thousand jobs. Its workforce continues to grow, boosting the local economy and fuelling healthy demand for property.

Other large local employers include Moneysupermarket.com, which has its registered head office in nearby Ewloe. There is also the Countess of Chester Hospital, the frozen foods company Iceland and, of course, the tourism industry itself. Collectively, tourist businesses contribute £1.78 billion to the local economy each year and sustain approximately 27,000 jobs.

Another significant employer  is University of Chester, one of the oldest higher education institutions in the country. It has five campuses in the city alone, including a science park, a business school and sites teaching a variety of vocational courses.

These organisations are all helping to ensure that prospects for employment remain excellent, that the property market remains buoyant, and that living conditions in and around Chester remain amongst the most appealing in all the country.

 

Inward Investment

Some of the most notable developments in the vicinity of Chester are being orchestrated by the Chester Renaissance Board as part of a 15-year regeneration programme. Called the One City Plan,  it is designed to run from 2012 to 2027 over three phases. The first phase saw £37 million invested in a new 800-seat theatre, which economic development experts predict will support 400 jobs and attract an extra £17 million of visitor spending each year. Phase 1 also includes the construction of the £300 million Chester Northgate Scheme  – a retail and leisure development that seeks to generate around £140 million of extra annual income and to deliver 1,000 permanent new jobs.

Meanwhile, the city centre itself will be undergoing a £100 million facelift, through which planners seek to enhance the shopper/visitor experience, boost the retail sector and thereby support around 3,500 new jobs by 2028.

Elsewhere, Chester’s Cathedral Quarter will be the subject of regeneration work. The city will also benefit from a new waterfront development and a business improvement district. In subsequent phases, the One City Plan will also deliver improvements to the Castle Gateway, Chester’s famous Roman amphitheatre, the racecourse and several other well known city districts.

Further out, Chester Zoo will see a £225 million upgrade, which is part of a tourist strategy designed to produce a 100% increase in visitor numbers by the middle of the next decade. If successful, that strategy would swell the tourist revenue coffers by as much as £3 billion each year.

Cheshire Science Corridor is yet another important development. In March 2017, growth director John Adlen noted its potential to energise the regions economy, explaining that the  250-acre enterprise zone was designed to attract international investment, to support 20,000 new jobs and 500 new businesses. He said: “We want to put Cheshire on the map with its outstanding science and technology assets. Our aspiration is to create a new golden triangle in the North.” The site will focus on high value, knowledge-based sectors such as energy technologies and biotechnology.

And so the list goes on. In the pipeline, there are also approved plans for new hotels and supermarkets, new office developments, and infrastructure improvements to support it all – including improved rail links to John Lennon Airport.

In short, there is every reason to believe that Chester’s fortunes are on an upward curve; that business will continue to thrive and that the city as whole will benefit from a steadily improving economy. Should that prove to be the case, then that will spell unequivocally good news for residents, home-buyers and anyone with a commercial stake in the city.

 

Chester’s Housing Market

Despite all the activity now taking place in Chester, local property prices are still affordable, particularly when compared to the overheated markets of the South. Accordingly, those seeking attractive, high quality rented accommodation can still find reasonably priced apartments within easy commuting distance of all the major centres of employment. Likewise, investors will recognise that lower absolute prices often translate into very attractive yields.

Chester – Key Facts

 

According to the LendInvest Buy-to-Let Report for June 2017, the average Chester property rose in value by 3.8% over the last 12 months.  Rental prices rose by 5% and average rental yields stood at 4.87%.

For house buyers, the prospects are equally encouraging. Borrowing rates are currently at an all-time low, properties in Chester are still sensibly priced and the prospects for capital appreciation are extremely encouraging. Given the perennial shortage of good family homes on the market, prices were already destined to increase, but given the scale of inward investment, more jobs and more people with disposable incomes should see capital values rising steadily.

Over the last year, affordability concerns have had a constraining effect on price growth at the national level but northern markets have been less affected than those in the South. Having risen at a slower rate, prices in the North now have greater room to move. For markets like Chester, where people are drawn by the promise of a better quality of life, the implications can only be positive.

 

Leeds – the case for investment

  • Yields and rental growth are better in the North
  • Leeds has an exceptionally strong economy
  • The city region is seeing massive inward investment
  • New jobs will drive further demand for rentals
  • Capital appreciation is likely to be more sustainable

For some considerable time now, the traditional division of fortunes between North and South has been reversed, at least with respect to the UK property investment market. Overheated prices in central London have long made healthy yields difficult to achieve and, in recent months, average rental incomes have fallen sharply in the capital.

By contrast, the more reasonably priced properties of Northern England and Scotland have continued to deliver solid returns for investors. Yields are considerably better, rental incomes are still on the up and, because prices started from a much lower base, there is still considerable room for capital appreciation.

Of course, it is never wise to generalise about entire regions. Market conditions vary not merely between regions, cities and towns, but even between neighbourhoods. As ever, the key to making a successful  investment is to take advantage of detailed local research.

In this post, we won’t be attempting to point you to towards any specific opportunities, but we would like to draw your attention to the rising fortunes of one particular city, which should now be on the radar of any serious investor.

Leeds

As an investment market, Leeds is notable for having a strong and thriving economy and, more significantly, for having secured a staggering amount of inward investment. The influx of literally billions of pounds of public and private sector money is having a transformative effect on the city and on local employment. The implications for property demand, rental yields and capital appreciation are all looking extremely promising.

According to data published by the Leeds City Region Enterprise Partnership, Leeds itself makes a very compelling investment proposition. Its economy is worth £18 billion per annum, a figure that has grown by almost 40% over the course of the last ten years. Much of this activity is the result of the 25,000-plus businesses that are based in the city, which boasts the highest private-to-public jobs ratio in the country.

Growth sectors

A modern, well-connected city, Leeds is witnessing rapid growth in many high-value industries including advanced manufacturing and the financial sector. Indeed, Leeds is now the country’s second largest financial centre after London, employing more than 14,000 people in banking and a further 46,000 in related professional services. The Local Enterprise Partnership notes that “The financial and professional services sector in the city is highly skilled and set for significant growth (50% by 2022).”

Leeds can boast a number of other exciting growth sectors – electronics, retail, call centres, digital industries and media to name just a few – but one of its most important is healthcare. The LEP describes Leeds as: “the UK’s health and innovation city, with a unique and influential health eco-system that is unrivalled globally. Four out of five NHS national offices are based here, including NHS England, the largest single health commissioner in the world.”

Leeds City Region

It is also useful to consider the city in its broader regional context because here again, it exhibits important strengths for the forward-looking investor. Crucially, it is located at the centre of the rapidly expanding Leeds City Region, which is the UK’s largest city region economy. Recent figures put the value of its economy at £60.5 billion, which in economic terms puts it comfortably ahead of the GDP of nine EU countries.

Some headline figures give a good sense of the region’s importance:

  • 3 million residents
  • 1.4 million workforce
  • 35% of the working population educated to degree level
  • 109,000 businesses
  • 8 world-class universities
  • The UK’s largest manufacturing base
  • 127,422 employees in manufacturing
  • 37,813 employees in advanced manufacturing
  • Accounted for 5.6% of all foreign direct investment into the UK (2016)
  • FDI has risen by 145% since 2013
  • Its £6.3bn visitor economy has grown by 50% in the last decade
  • Over £1 billion investment secured for skills, growth and infrastructure
  • Over £5 billion of additional investment secured

Leeds City Region will also be a key player in the planning of the Northern Powerhouse strategy, and it will be a prime beneficiary of the proposed HS2 rail link.

Major Investments

In recent years, Leeds has benefited from some substantial investment projects. Its retail economy, for example, has been buoyed by the development of the £350 million Trinity Leeds shopping centre, which attracted over 22 million shoppers in its first year.  Similar schemes have included the £60m First Direct Arena, and the  £150m Victoria Gate development which is now home to major brands such as John Lewis.

The eastern line of the HS2 rail project will prompt the creation of a new state-of-the-art station in the city centre and this, in turn, is expected to stimulate further investment and employment. In addition to York Central Station, there will be new stations at White Rose Office Park, Thorpe Park and Leeds Bradford International Airport Parkway.

The region has sought to cement its position as the country’s second largest economy by developing the Leeds City Region Enterprise Zone. Launched in 2012, just two miles from the city centre, it boasts 142 hectares of prime development land. It is served by the East Leeds Link Road; a £32 million dual carriageway that connects the city centre to the M1 motorway. According to the Local Economic Partnership, the zone “is expected to deliver £550 million of additional economic output and over 9,500 new jobs to the region once it’s fully developed.”

Moreover, the Leeds City Region Enterprise Zone is just one of three such enterprise zones in the region, so expansion is being supported throughout the area. In a recent survey of senior executives from over 500 of Europe’s largest corporations, Leeds was named as one the best  places in Europe for business relocation.

Leeds Bradford Airport

In April 2017, Leeds Bradford Airport published its masterplan for the next 13 years of development. Called ‘Route to 2030,’ it sets out how the airport will realise its ambition of serving an estimated 7.1 million passengers by 2030. Key elements include a new road link, the Airport Parkway railway station and a new economic hub featuring three zones: an airport village, an air innovation park and an air freight park. These zones may well be accompanied by new industrial and office space.

Jobs and Economic Growth

In light of all this frenetic economic activity, the local economic partnership has developed a Strategic Economic Plan that sets some impressive targets. It intends to deliver more than £5 billion of economic output by 2021, and to create 62,000 additional jobs.

For the property market, all the signs are therefore very good. A thriving economy means more jobs, of course, and that inevitably translates into rising demand for conveniently located accommodation. That will suit landlords offering either traditional rentals or serviced apartments. What’s more, the city’s focus on creating skilled, high value jobs implies that a significant proportion of that demand will be for high quality properties that meet the needs of higher-paying professional workers.

As for the longevity of demand, Leeds once again delivers grounds for confidence. It is seeing not just fleeting, one-off investments by relocating companies, but rather wholesale improvements to its infrastructure. With the city and the wider region repositioning themselves to become a truly modern business destination, property investors can be confident that economic growth and demand for accommodation will remain healthy and sustainable for many years to come.

With all this in mind this is one reason why our latest investment project offering for our clients is Rivermill Court

Located circa 2.5 miles from Leeds city centre, Rivermill Court provides an exceptional opportunity to acquire a contemporary unit – perfectly catered towards the city’s large student population.

 Investment Highlights:

·         27 Beautifully restored apartments in a converted historic mill

·         A mixture of studios, mezzanines, 1 and 2 bedroom apartments

·         Studio and Mezzanine apartments already completed

·         1 and 2 Beds to be completed by November this year, 2017

·         A mixture of 6 and 7% NET rental yield guarantees (Depending on which apartment selected)

·         Cash buyers receive a 2 year guarantee and finance buyers receive a 1 year guarantee

·         Fully furnished

·         250 year lease from January 2015

·         Kirkstall Riverside location

·          2.2 miles from the University of Leeds

·         0.52 miles from Headingly train station

·         65,000 students studying in Leeds, spread over 3 premier Universities

·         According to the Independent, Leeds was recently named the UK’s best student City

·         Studio apartments from: £89,995… One beds from £99,995… 2 bed from £149,995

For more information on Rivermill Court or any other investment projects please contact our office on +44 1244 343 355 or email info@residential-estates.co.uk