By Rebecca Ellis
THUR, MAY 10 2018-theG&BJournal-In the struggle to normalise the financial markets, the U.S. Federal Reserve and the Bank of England have committed to raising interest rate this year. The 10-year Treasury yield has risen to 2.62%, while the yield on 10-year UK Gilts has ticked up to 1.44%
This has pushed some investors towards a rethink of their equity and property market investments, the two asset classes which have been the main beneficiaries of quantitative easing.
Rising yields have the potential to hurt the property market, but what are the trends in the UK, an international hotspot for non-residential buyers:
Tightening in the Buy-to-Let markets:
The number of buy-to-let landlords in the UK has fallen since the introduction of various recent changes by the Prudential Regulation Authority (PRA) in September 2017. Since the changes, a landlord whose portfolio included four or more properties will face specialist underwriting procedures that include additional affordability tests, which could mean, for example, that they have to produce supporting documentation such as business plans. This increased documentation and information on affordability, in an environment where interest rates are likely to increase, has had a significant impact on the market.
More lenders in a smaller place, falling prices of mortgage products:
The overriding trend over the past five years has been a big reduction in the cost of mortgages across the board – most mainstream products have undergone a double-digit percentage reduction. Mortgage product numbers give a good indication of the health and competitiveness of the market. Five years ago there were 3,200 products available to mortgage advisers, now there are 10,000. An additional 4,214 products have been introduced into the residential mortgage market over the past two years alone and buy-to-let product numbers have increased to 2,971 from 1,516.
Drop in valuations:
The UK markets saw growth drop from 4.4% to 4.1% in the annual houses price according to the latest report. In central London, for the first time since 2009, there was a -0.1% decline in growth, the Office of National Statistic and Land registry bonds said in their report for April 2018.
The headwinds of Brexit have created uncertainty, putting the capital appreciation of asset prices on its most uncertain footing in 25 years.
Is uncertainty making it harder for companies or consumers to borrow?
So far, this is not the case. Financial conditions are the easiest they have been since the mid-1970s. Capital markets are awash with liquidity and always on the look-out for yield. This is good news for borrowers as it can be seen in the declining default rates. Consumer sentiment is picking up, the residential real estate is once again on the upswing. Price rises have been most prominent in markets that have seen mortgage interest costs fall close to record lows, coupled with readily available credit, steady economic growth and limited housing supply while employment prospects remain solid.
What does this mean for property owners in the UK?
To illustrate the possible deals we have to consider these changes:
Buy to live – Current average is between 2.05% to 3.5%
Buy to Let – Current average is between 3.53% to 4.24%
An example:
A buy-to-let owner with a 60% loan-to-value two-year fixed BTL mortgage would today be paying around £2,000 less per year on a £150k mortgage than they were five years ago.
The Conclusion?
Whilst rates may be moving, it is worth spending time on finding the right lending partner in the market. For more information please contact Rebecca at Pomona Wealth for more information on indicative quotes and information on UK Lending products.
Rebecca Ellis is a Personal investment advisor, based in Zurich| REBECCA.ELLIS@POMOMAWEALTH.COM|PASCAL.CREPIN@POMONAWEALTH.COM
