The Government has hiked its profit forecasts for the Stamp Duty Land Tax surcharge by 81 per cent to £7bn, despite admitting being unprepared for the number of deals timed to dodge the extra tax.
Documents published as part of the Autumn Statement say the 3 per cent surcharge on buy-to-let and additional properties was expected to raise £3.8bn from 2016-17 to 2020-2021.
The documents say: “The measure came into effect on 1 April 2016, providing a four month window from announcement for buyers to bring forward transactions and avoid the surcharge.
“We did consider this behaviour when scrutinising the original costing but it seems likely we underestimated its size.”
Despite this, the Treasury has still collected more tax than expected and so has increased its expected surcharge tax take by 81 per cent to £6.9bn.
However, the Treasury says its original prediction was uncertain due to “low quality data and the potential for a large behavioural effect”.
It adds that its updated total bill predictions are still uncertain as taxpayers can get a refund within three years of selling their main residence and this might skew the figures.
The surcharge was announced in November 2015.
UK economy
Economic data are like buses. You wait for one, and a couple come at once. Data on the two main measures of the economy are now available for the post-referendum period.
The latest release of GDP covers the period of July to September. Growth was stronger than most expected back in June, with the Office for National Statistics reporting that the economy grew by 0.5% compared to the three months to June.
Labour market data supports this. The unemployment rate fell to 4.8% for the period of July to September, the lowest rate for 11 years. The employment rate, the proportion of people in employment, remained at a joint all time high too.
While inflation dipped slightly in October to 0.9%, the upward trajectory of inflation is largely unchanged. This is as large drags from food and energy prices last year drop out, while the recent Sterling depreciation is expected to push up import prices.
In the Bank’s November Inflation Report, the MPC expects inflation to reach 2.7% by the end of 2017. Inflation is then expected to remain at that level for a year, before falling to 2.5% by the end of 2019.
In response to this expected overshooting of inflation relative to its 2% target, the MPC has said it is willing to look past some above-target inflation, as the cost between that, and the alternative, which would be to tighten monetary policy, is too much to consider doing so.
It did however caveat this by pointing out that there are ‘limits to the extent to which above-target inflation can be tolerated’.
Given that earnings growth is currently at 2.4%, the rising inflation outlook could lead to flat or negative growth in real earnings over the next few years.
The MPC at its November meeting left interest rates unchanged and has all but taken an imminent rate cut off the table, as it stated that ‘Monetary policy can respond, in either direction, to changes to the economic outlook…’.
Eyes now turn to the Chancellor, Philip Hammond, as he delivers his first Autumn Statement on 23 November. Given a worsening public accounts forecast, we should perhaps manage our expectations on the possibility of any new policies.
At around the same time as this, a Housing White Paper is due to be published, outlining housing policy until 2020.
Housing and mortgage markets
The housing market has continued to fare better than many expected, with survey indicators still painting a relatively positive picture. The Royal Institution of Chartered Surveyors survey showed demand holding up well.
The problem is that this demand is still not being met with a supply response. New instructions to sell have fallen, or been relatively flat for more than three year now. This has led to the average number of properties per surveyor falling to its lowest level for nearly 40 years.
The impact of this is that it limits the number of potential transactions, as well as pushing up prices, as the relatively few properties up for sale are bid up by a growing number of buyers.
And while net additions to the housing stock reached their highest level for 8 years, it’s still the case that the vast majority of properties on sale are existing homes, not new ones.
House purchase approvals picked up in September from its 20-month low last month to reach nearly 63,000 approvals. As a result, the Bank of England revised up its forecast for approvals from 56,000 to 65,000 after conceding that the housing market is doing better than it expected back in August.
House purchase approvals tend to lead property transactions a few months. So given the weakness in approvals in August, transactions in October are likely to be at or around the same level as September, before recovering slightly in November.
Our forward estimate for gross mortgage lending in October totalled £20.6 billion. This is flat compared to compared to September but slightly weaker than last October’s lending figure.
On a like-for-like basis, total lending has been stable over the last few months. At this rate, it looks likely that gross lending for the whole of 2016 will be between £240-245 billion, which would represent a 10-12% rise compared to 2015.
Competitive mortgage rates, along with the August rate cut, will help with the debt burden for recent borrowers, but more fundamental factors still limit house purchase activity.
While first-time buyers have been supported somewhat by various government schemes, the real weakness is coming from second steppers and other home movers, whose activity has continued to be fairly subdued since the financial crisis.
Factors limiting activity include uncertainty surrounding the economy, affordability pressures and the macro-prudential rules announced in 2014, which are currently under review, with the outcome expected to be published on 6 December.
As a result, first-time buyers buying with a mortgage have accounted for a higher proportion of house purchases loans in recent years. To put this into context, it was fairly typical for first-time buyers to make up just over a third of house purchases in the early 2000s. They now make up about half of house purchases.
On buy-to-let, a different set of factors are weighing on house purchase activity. Lenders have been tightening affordability criteria ahead of the Prudential Regulation Authority’s stress tests coming into effect in January 2017, and the forthcoming interest tax relief changes in April 2017. This runs alongside the recent stamp duty change on second homes, which means softer buy-to-let activity can be expected to continue for the foreseeable future.
As a result, the mix of lending has slowly moved towards remortgage activity, and it now accounts for just over 40% of lending, compared to about a third over the last few years. This trend is likely to continue in the near future.
https://www.cml.org.uk/news/news-and-views/market-commentary-november-2016/
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Those interested in securing a home on the development can now place an early bird reservation on selected plots, ahead of the full sales release in December.
With more than 200 registrations of interest from potential buyers, the collection of homes is already in high demand.
Anita Onal, sales manager for Story Homes in the North East, said: “The launch of Oakland Park in Morpeth is a significant step for Story Homes – not just in the North East but company-wide. Already well-known for our high specification homes, the Signature range goes one step further to offer customers a very superior finish.
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https://youtu.be/aUwznC9UsjQ
At the end of September, the Government announced that it was calling to an end its Help to Buy mortgage guarantee scheme at the end of the year. The scheme has helped many people get on the property ladder with as little as a 5% deposit. It did this by providing a guarantee to the lender, that it would pick up some of the losses in the borrower defaulted on their payments. This made lenders much more willing to lend to people who only had a small deposit, which has been a great help to first time buyers wanting to buy their first home.
The scheme has been available since January 2014 and by June this year (2016) it had helped over 91,759 people buy their first home according to the Department of Communities and Local Government.
So what happens now
There are three different parts to the Help to Buy scheme, the part that will stop at the end of 2016 is the part that enables you to buy a home with just a 5% deposit. This means that the number of mortgages available to people with just a small deposit is likely to drop in the new year.
So what should you do now?
If you are looking to buy a house imminently and you have at least a 5% deposit, now is the time to buy so that you can take advantage of the scheme before it is cancelled at the end of the year. There is now a rush of first time buyers trying to get on the scheme. It can take a few weeks to get your mortgage in place, so there really is no time to waste. Even if you are not sure if you will qualify for the scheme it is worth coming to see a qualified mortgage adviser, like those at Mortgage Pathways, now in order to find out what your options are.
Valuation firm Connells Survey and Valuations reported that, spurred on by record low mortgage interest rates, the number of first time buyers needing a survey so they could buy their first home increased by 18.7% this September over September last year.
What if you cannot buy this year?
A significant benefit of the Help to Buy mortgage guarantee scheme is that it encouraged a number of lenders to launch mortgages for those people with only a 5% or 10% deposit when they didn’t before.
Now while the number of these mortgages has fallen back over the last few months, according to price comparison site Moneyfacts, there are more than thirty lenders offering mortgages for those with only a 5% or 10% deposit, outside of the Help to Buy scheme.
At the start of October there are still 233 different mortgages available to people with a 5% deposit and another 564 mortgages for those with a 10% deposit.
Next steps
Whether you are hoping to buy this year or need to wait until the beginning of next year it is a good idea to speak to a professional mortgage adviser as soon as possible to discuss your options.
The adviser will run through your situation with you and look at whether you will qualify for the Help to Buy scheme. If there is the possibility of you being able to take advantage of the scheme, where interest rates may well be lower, they will also be able to advise you on what you need to do next. The adviser will then take you through the process step by step.
Longer-term fixed rates look set to increase because 10-year gilt yields have risen from a low of 0.527 per cent in August to 0.98 per cent at the end of last week.
The past few weeks has seen lenders continuing to cut prices on some of their fixed-rate deals. However, with swap rates edging up and the markets already pricing in any further potential cuts to the Bank of England base rate, brokers believe fixed-rate deals have reached the bottom.
“Longer-term fixed rates are likely to start creeping up as 10-year gilts moved sharply following Prime Minister Theresa May’s comments suggesting the Bank of England should rein in quantitative easing. A 0.15 per cent cut to base rate has already been priced in to the market.”
Speaking at the Conservative Party conference, May criticised the Bank of England’s policy of low interest rates and money printing, saying it had benefited only the wealthy. She said: “People with assets have got richer. People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer. A change has got to come. And we are going to deliver it.”
The prime minister’s criticism was unusual given the independent status of the BoE but Downing Street denied it was an attempt to influence monetary policy.
Ipswich Building Society chief executive Paul Winter says lenders will not fully reflect any further base rate cut because it will be “unaffordable for them”.
He adds that building societies in particular would be loath to cut interest rates any further because savers, who are already suffering, would earn even less on their money.
Buy-to-let, where you invest in a property to rent out, has been growing in popularity and is increasingly seen as an attractive investment option by many new and existing property investors. In fact, according to lender Kent Reliance, in the past year alone the average buy-to-let return in the UK stood at 13.6%, which is £28,617 in cash terms.
Indeed, despite moves by the former chancellor George Osborne to make buy-to-let less financially attractive, we have seen more enquiries than ever from people interested in investing in property, with some seeing it as a safer bet compared to the stock market with its large fluctuations up and down.
According to a Buy-to-let Index from letting agents Your Move and Reeds Rains, the average existing landlord in England and Wales has seen total returns of 10.2% over the twelve months to May. The Index goes on to say, “In absolute terms this means that the average landlord in England and Wales has seen a return of £18,769 over the last twelve months, before any deductions such as property maintenance and mortgage payments. Of this, the average capital gain (the amount the house has gone up in value) contributed £10,057 while rental income made up £8,712 over the twelve months to May.”
Things to consider
If you are thinking about investing in buy-to-let for the first time, it is important to do things right. You should ask yourself what type of property you want to buy and in what location. What makes a good rental property is not necessarily the same as the sort of house you may want to live in personally. Many people renting are young people, who may or may not have their own car, so a house you are renting out ideally needs to be close to public transport, and near to shops and schools.
Just like any other investment, you must ensure that you are aware of the potential risks as well as the rewards, and this is what our professional mortgage experts are there for. Buy-to-let is something that you should invest in over the long term. Anybody who has already bought a property will know how long it takes both to buy and to sell, so it is always a good idea to have other savings and investments too. You must also be able to afford ‘void periods’ the time between when one tenant leaves and the next one moves in, when you may receive no rental income.
Buy-to-let, of course, has associated costs but, due to the challenges of getting on the housing ladder, inward migration and people living longer, demand has never been greater. Although there has been talk around the future of house prices, landlord tax and regulatory changes, rents are expected to rise and, with housing demand still outstripping supply, demand from tenants is also anticipated to increase further.
As a result, despite the recent Brexit vote, in our experience the vast majority of landlords appear to be undeterred by the result.
Finding the right mortgage
There are a wide variety of buy-to-let mortgages and the one suitable for you will of course depend on your circumstances as well as the lender’s criteria. Our specialists are there to talk you through what deals are available and weigh up which one is right for you. Some buy-to-let mortgages do not even take your income into account, instead they look at the amount of rental income that you are likely to earn on the property.
In addition you do not have to be an existing home owner to get a buy-to-let mortgage, although the lender will want to be 100% sure that neither you, nor a close family member will live in the property.
The perfect storm
There are currently a wealth of opportunities in the buy-to-let sector and it is evident that bricks and mortar remain a sound investment for many investors. In fact, there is almost a perfect storm: mortgage rates at lifetime lows, increasing demand for rental properties from tenants and rising property markets.
Although the world of buy-to-let can seem overwhelming at first, thanks to our market experience and knowledge the advisers at Mortgage Pathways can help to ensure you go into any property investment with your eyes open and get the most suitable buy-to-let mortgage for your needs.
For more information on buy-to-let click here or pick up the phone and speak to one of our friendly advisers today.
