Good in principle but maybe not in practice
I have had a lot of questions about the impact of the EU legislation to regulate buy-to-let mortgages and how it will affect the property market in the UK.
First of all I am very familiar with this type of legislation, it’s the exact way we do things in Australia. Linking income to the purchase of a investment mortgage application is how almost all mortgages have been done for years.
Let’s step back for a minute… would you lend money to a person you probably don’t know and who won’t tell you what other debts, commitments, and assets they have?
Let’s say this person has 20 properties, £3 million in debt. £500,000 is equity and a negative cashflow of £3000.
Surely you would want to know this information before deciding to lend to this person and more importantly you would want to take this into consideration before you lent money to them.
Even if the cash flow of the property investment was £300 per month. We all know that a cash flow positive property can change dramatically with interest rate rises and a few extended void periods.
Despite this, this is exactly how the UK mortgage market has run for many years. Now I am not complaining, I benefited from the easy mortgages of the early 2000’s, I built my UK portfolio on the back of this. So I am contented and so too should all of the other people be who jumped into property during this period to build a portfolio.
However, many people did buy far too many properties than was prudent.
So I personally don’t think it is a bad thing, it will slow down the building of oversized portfolios that lack cash flow and equity so that people have to think to buy and therefore, hopefully people won’t be so easily lead by property investment sharks and slippery sales people. It might not make people more intelligent in choosing property but hopefully it will force them to think harder about each property they choose.
So that’s the positive side as I see and I think if you didn’t know any different you wouldn’t bat an eyelid about it.
Most people’s concerns about this, besides a bunch of old failed politicians (the EU) butting their noses in where no one wants them, is that the changeover from the current system will cause massive disruption to an already fragile property market.
I don’t believe this to be the case and let me explain why
We are in a recession or downturn whatever you want to call it. I don’t think there is any real political will from any corner to potentially screw with the way things are right now and head into the unknown. So in the first instance I don’t think anyone wants this now. So even if it does come into effect I think you will find it’s at least 3 to 5 years down the track.
Secondly I think by the time the EU sloth gets its act into gear and implements this (which I think it will eventually but not for some time) we should be on the way to recovery and on a much better footing. So the impact it will have should be minimal.
Who it will affect?
This is the real question I think. There may be an initial slow down when they do introduce it but this will be because the industry has to get used to a whole new way of doing things. Much more information will be required from buyers and lenders will have to get used to the requirements as well. This will cause a backlog of work and longer approval times (if that is presently possible).
Those with larger portfolios should be ok because they will be considered professional investors and will have access to some lines of portfolio mortgage money that smaller lenders don’t. Unless of course you have a small income in which case you won’t be able to remortgage and the only way out will be to sell some property or hold the property. People aren’t stupid so they will hold until it’s suitable.
Despite me saying this the media is going to try and make you think that that’s exactly what everyone will do. Run out and sell, flooding the market and driving prices into a free fall. Will this really happen? Is this what people did when the economy slowed down in 2007/2008, no they held onto their investment property.
Those small investors that are just starting out and have decent incomes will also be fine.
Understand this legislation is an attack on low incomes and high consumer debts so they are the people who will struggle to build a larger portfolio quickly. The operative word is ‘quickly’ here, you’ll still be able to do everything you ever did but just not as quickly.
Oh and by the way, watch out for the low-doc loans comeback, the FSA may have tried to kill them but I am sure they’ll come back in some form. This will mean that as long as you have the equity the whole legislation will be irrelevant to you.
Irrespective of what the legislation looks like or how long it takes you will still have no choice but to build your portfolio to secure you future. So call the team and find out how to do it in a directed and purposeful manner on +44 (0)207 923 6100 or directly on their mobiles.
Live with passion,