We’ve spoken with Matthew Wyles, a director at Castle Trust Capital plc, to discuss the shifting landscape in buy to let and how the lender can help equip investors to benefit from a changing market.
Are there still opportunities for landlords in buy to let?
Yes – without doubt.
Clearly the landscape is changing. Rising Stamp Duty and adverse tax treatment have made life more expensive for landlords and the new minimum stress tests, which were introduced by the Prudential Regulation Authority (PRA) at the beginning of the year, have made it even harder to benefit from leverage.
Growing complexity is going to lead to a shake-out – there are signs of this already beginning as smaller amateur landlords recognise that they do not have the time, skills, or resources to compete. But for the well advised, savvy investor there will be opportunities.
What options are there for investors who struggle with rental calculations?
Over time there is a strong inverse correlation between yield and capital growth. Properties which enjoy sustained strong capital growth tend to have lower yields and this can make it tough for the investor who wants to leverage to invest in these markets.
But there are ways for landlords to increase leverage. At Castle Trust, we offer first and second charge buy to let loans with the option to roll up some or all of the interest. Any interest that is capitalised is not subject to a stress test and this enables us to structure flexible solutions for landlords who want to increase their leverage on lower yielding assets.
As an example, we recently completed a mortgage for an experienced investor who wanted to purchase a maisonette in South West London valued at £800,000. The investor wanted to borrow £490,000 to buy the property but the rental value was only £2,000 per month and so the cashflows didn’t work.
We were able to deliver Day 1 financing at 70% LTV and then roll some interest up on top.
This solution was achieved by splitting the balance and enabling the investor to use the rental income to service most of the loan and roll up roll up interest on the balance.
As a result, the client was able to invest in a sought-after property with robust potential for capital gains even though it delivered a relatively low yield.
Are you seeing a shift towards any other type of property investment?
Savvy investors are always seeking new ways of driving out the best possible returns and, with the squeeze on standard buy to let, there is growing interest in more unconventional investments such as holiday lets.
Holiday let income tends to be seasonal and lenders do not have the comfort blanket of an AST. Castle Trust has invested in understanding this market and we are confident of delivering a financial solution which maximises borrowing capability without exposing investors to excessive cashflow risk.
What do you think the impact of Brexit will be on buy to let?
We think the London property market is more exposed to the outcome of the Brexit negotiations than the rest of the country. In general, however, Stamp Duty and reductions in the tax deductibility of mortgage interest are more serious medium-term threats. We are still seeing a steady flow of applications from ex-pats and foreign nationals who are looking past short-term volatility and who want to invest in a housing market which is structurally and chronically short of stock. We don’t this see this fundamental changing for the foreseeable future.
We expect Sterling to continue to underperform against major currencies such as the US Dollar and the Euro during the run-up to Brexit and that this will make the UK market attractive to foreign investors. We stand ready to assist those investors when the opportunity arises.