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The Government’s scheduled publication of their White Paper for the Renter's Reform Bill, which incorporates proposals to forbid Section 21 evictions and introduce ‘Lifetime Deposits’, has been suspended until 2022.
The additional time is required to give a chance to create a level playing field to reforms for both landlords and tenants in the private rented sector in England.
In this article, I want to look at these lifetime deposits. How could the Lifetime Deposit Scheme work, and how could they benefit both Luton landlords and Luton tenants?
When a tenant moves between rented homes, they need the deposit for their new home before being released from their old home.
The average deposit for a Luton rented
home stands at £1,134.
This means finding that amount of money at the time of moving home can be difficult for many tenants; thus, they become stuck in their existing rental.
Therefore, Westminster wants to propose in this White Paper a new deposit choice for tenants. A deposit is transferred from the old landlord (letting agent) to the new landlord (letting agent), thus making life simpler as the tenant doesn't need to save for an additional new deposit every time they move home.
Now, of course, it's vital that any new ‘deposit scheme’ does not dissuade Luton landlords from making valid claims for damage to properties. Landlords cannot be expected to give up their right of recourse to a security deposit until such time that they are satisfied there will be no need to claim it.
So how would Lifetime Deposits work?
There would need to be some form of system safeguarding that the new Luton landlord is protected by a whole deposit, even if the deposit on the old Luton home comes into dispute.
This will be critical and central to Luton landlords having conviction in the Lifetime Deposit Scheme. That could be something like an interest-free loan for the tenant on the crossover between the properties.
Another advantage to the scheme is that ‘lifetime deposits’ could be used for tenants to build a deposit for a house for the future.
What about the existing system of deposits?
The rules regarding the amount of deposit held by a Luton landlord were changed a couple of years ago, where only five weeks’ worth of rent can be held as a deposit.
The deposits Luton tenants have had to save for certainly raises the cost of renting a Luton home.
Some say this extra burden puts another nail in the coffin of the dream of homeownership for many Luton renters. To give you an idea of the level of deposits held for Luton rental properties…
The total of all the tenants’
deposits in Luton is £19,503,901.
Yet the other side of the argument contends that if the Luton tenant misses more than one month’s worth of rent, the landlord is immediately out of pocket, even before they’ve got the costs of solicitor and any improvement works from the tenant trashing the place.
Does a deposit of just over one month provide Luton landlords with a decent level of protection against unpaid rent or damage to the property? When you consider…
The total value of all the privately rented properties
in Luton is £4,600,512,275.
Before I conclude my thoughts to the initial question of ‘lifetime deposits’, the need for decent landlord insurance to ensure you are adequately covered as a Luton landlord is vital.
So, what are my thoughts on ‘Lifetime Deposits’?
It is my opinion the common need for Luton tenants to stump up a ‘two-fold deposit’ is not helping many Luton renters when it comes to moving home. It’s clear the standard cash down deposit is not fit for purpose for the 21st Century.
One might suggest the Government’s quest for the ‘lifetime deposit’ could open the door to other deposit alternatives that have come onto the market for tenants in the last few years.
Some landlords don’t require a deposit yet are compensated by asking the tenant to pay a higher rent to cover the risk. Also, there are companies that offer insurance backed deposits where the tenant pays one week's rent to an insurance firm, and the insurance firm pays out if a loss is incurred by the landlord.
Interestingly, other countries are already offering deposit loans and guarantee schemes. Could this be something for the British Government to contemplate?
We must wait until at least the spring of 2022 for the Renter’s Reform White Paper to be published. Then every stakeholder involved (tenants, landlords and agents, et cetera) can look at it in the cold light of day and decide how this will affect the way they view the landlord/tenant/agent relationship.
Many will say the bigger issue isn’t ‘Lifetime Deposits’ in the White Paper, but the removal of no-fault Section 21 evictions. The removal of Section 21 is something the current Government have pledged to bring in during this parliamentary cycle (i.e. before Q4 2024).
I am not concerned about removing no-fault Section 21 evictions, but what will replace it to ensure there is suitable redress for landlords if the tenant doesn't pay the rent?
Of course, a handful of Luton landlords will decide to sell their rental portfolio because of the White Paper. The same happened in 2016 when the increase in landlord taxes were announced.
However, this will reduce the supply and availability of Luton rental properties, meaning rents will rise (classic textbook supply and demand), thus, landlords return and yields will rise.
Yet, because tenants still can’t afford to save the deposit for a home and we are all living longer, the demand for rental properties across Luton will continue to grow in the next twenty to thirty years. The reason being we are still not building enough homes to accommodate our growing and ageing population. This means we will turn to more European ways where the norm is to rent rather than buy in their 20s and 30's.
This means new buy-to-let landlords will be attracted into the market, buy properties for the rental market in Luton and enjoy those higher yields and returns. Isn't it interesting that things mostly always go full circle?
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In recent articles on the Luton property market, I have been talking a lot about house prices over the last 12 months and 5 years in Luton.
When it comes to newspapers talking about the property market, the headline most people look at is what is happening to house prices.
However, as 2 in 3 (65.1%) of Luton home sellers are also home buyers, the price is almost irrelevant. Let me explain.
If your property has gone down in value – the one you want to buy has also gone down in value – so you are no better or worse off (and if you are moving up market – which most people do when they move home – in a suppressed property market the gap between what yours is worth and what you will buy gets lower … meaning you will be better off).
Many property commentators (including myself) consider a better measure of the health of the property market is the transaction numbers (i.e. the number of people selling and buying).
Let’s take a look at the numbers for Luton.
The average number of properties sold in Q1 (Jan/Feb/March) between 2008 and 2020 was 177 properties per month, whilst Q1 in 2021 saw 203 properties sell on average per month (boosted by the March stats where an eye watering 265 homes sold). This meant …
14.5% more houses sold in the Luton area in Q1 2021
than the 14-year average
The average number of properties in Q2 (April/May/June) between 2008 and 2020 was 168 properties per month, whilst Q2 in 2021 saw only 139 properties sell on average per month, meaning …
17% less houses sold in the Luton area in Q2 2021
than the 14-year average
Finally, whilst the exact stats for Q3 2021 for our local authority won’t be published by the Land Registry for a couple of months, I can make certain calculated assumptions from the national data published by HMRC. The number of property sales for our local authority area in Q3 (July/August/September) between 2008 and 2020 was on average 196 properties per month. However, using the HMRC data, I calculate there will only be 141 properties sold on average per month in Q3 2021. This means …
27.9% less houses sold in the Luton area in Q3 2021
than the 14-year average
One of the two main drivers of activity in the housing market in the latter half of 2020 (meaning Q1 figures were better than the long-term average) was the battle for space, with many Luton buyers seeking larger properties to work from home. The second was the short-lived tax relief measures such as the cut to Stamp Duty Tax meaning property prices were at an all-time high.
But what also might surprise you is the number of people buying for the first time.
1 in 4 mortgages since lockdown have been
for first-time buyers (25.12%)
Luton first-time buyers, buoyed by parental help with their deposits, the Government’s 5% deposit mortgage and ultra-low borrowing costs, have also helped to push house price growth since the start of 2021. In fact, if you split down house price growth between second time (third time etc) buyers and first-time buyers, the national annual house price inflation for first-time buyers is 9.2% compared to 8.1% for the second or third etc buyers.
Yet, the Q2 and Q3 2021 Luton property market was worse than the long-term Luton average (in terms of property transactions)
The question is – should we be worried?
The UK economy continues to deliver a benevolent framework to the British housing market.
The labour market has outstripped expectations with the millions expected to join the dole queue at the end of furlough failing to materialise and with the number of job vacancies on the rise.
Of course (and I mentioned a lot in my recent posts), the Bank of England is projected to increase interest rates to dampen inflation in the coming months, with further small rises predicted over 2022, so I do expect the demand for property to cool off as mortgage borrowing costs increase.
Normally such rises in mortgage costs would mean less property would sell, yet nothing over the last couple of years has been normal.
Many Luton property homeowners have held back putting their property on the market in the last 6 months because they were afraid, they would sell their own home but not find another to buy – thus making them homeless (nothing could be further from the truth – yet that is what a lot of people incorrectly believe).
If the Luton property market slows and interest rates rise, mortgage costs will still be very low by historical standards.
Also, if the obstacle of raising the 5% deposit can be overcome by first-time buyers plus a confidence that existing homeowners won’t be made homeless because of a cooling property market, many more people could be tempted to enter the property market by placing their property for sale first …
… thus opening up the market to more buyers – which in turn will drive up transaction numbers back to their normal 14-year average. However, raising a deposit is likely to remain the primary obstacle for many.
If you are a Luton homeowner or first-time buyer and want my thoughts on the future, then please do drop me a line.
2022 is going to be an interesting year ahead for the Luton property market – only time will tell if this will be a brief respite or is it running out of steam?
Please tell me your thoughts on what you think will happen.
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How far would you go to help your child get on in the world?
Many Luton parents move area to ensure their child gets into the best primary school or fund their university costs. Many of you reading this have even helped your children with the deposit for their first home from savings.
However, I have come across many Luton people in their 50’s and 60’s who have good jobs and incomes, yet don’t have the savings to give to their children to help them buy their first home. It doesn’t help when you consider…
the average value of a Luton home has risen by 10.6% in the last 5 years, from £240,560 to £265,975.
I am therefore seeing increasing numbers of parents who are willing to re-mortgage their own Luton home or start a new mortgage (when they own their Luton home outright) — to get their children onto the Luton property ladder.
So, whilst the Government is trying to turn Britain’s 20 and 30 somethings from ‘Generation Rent’ into ‘Generation Buy’, the Bank of Mum and Dad are mortgaging their retirement to pay for it all. Yet it need not be cost prohibitive borrowing the deposit as you still have access to interest only mortgages.
With an interest only mortgage, your monthly mortgage payment covers only the interest on your mortgage, not any of the original capital borrowed. This means your mortgage payments will be lower than on a repayment mortgage, remembering though at the end of the term you will still owe the original amount you borrowed from the mortgage provider.
1 in 14 new mortgages are interest only and 1 in 5.5 existing mortgages are interest only mortgages, they are very popular.
Anyway, many Luton homeowners might be worried about having that level of debt in their golden years. However, many plan to pay off the mortgage when they downsize as they get into their 60’s and 70’s.
I talk to many Luton homeowners, who are asset rich but cash poor and desire to help their children onto the Luton property ladder. Their attitude is their children will inherit their property when they pass away, so it seems practical to give them that money to work harder for them earlier in their life when they need it to buy their first home.
Can you get a mortgage, even if you are retired?
A lot is dependent upon your age and financial position. The mortgage companies will see if you have adequate funds for your retirement and emergencies plus leaving enough equity in the property to enable you to downsize in the future. Like all things, you need to take advice from a qualified mortgage arranger.
So, that then begs the question, is there enough equity in Luton homes to borrow against?
In the late 1980s and again in the early 2000s, many Brits saw their homes as a cash machine. Numerous homeowners re-mortgaging at the end of their mortgage’s preliminary term (usually after the initial 2, 3 or 5 years), but when doing so increased their mortgage to enable them to buy a nice car or fancy holiday. Yet, by increasing the borrowing, it created negative equity in the early 1990s and stopped many homeowners moving home between 2009 and 2013 because of their lack of equity.
Therefore, I have to ask, have we borrowed too much this time round?
Looking at Luton and the specific postcodes LU1 to LU4 combined...
In 2016, the average Luton homeowner had a mortgage of £97,835 and today it is £121,174, a rise of £23,340.
Looking at these numbers, one might think we are again over-extending ourselves, yet as regular readers of my blog about the Luton property market will know – I like to drill down and look at all the figures.
Initially, I was worried about these stats, until I considered the equity Luton people have amassed over the same 5 years.
In 2016, the average equity held in a Luton homeowner’s property (whilst still having a mortgage) was £142,725, yet today that stands at £144,801, a rise of £2,075.
Even though mortgages have increased, Luton homeowner’s equity has risen even more, meaning as we stand today, mortgaged and owned-outright properties, there is…
£17,482,631,749 of equity held in all Luton homes.
Whilst the total value of mortgages has increased slightly since 2016, as a percentage, this has gone down meaning Luton homeowners and Luton landlords have increased their equity in the last five years.
It can quite clearly be seen that the financial insecurity sparked by the Credit Crunch crisis of 2008/9 has created a generation of Luton homeowners and landlords who are savers and improvers rather than movers and excessive borrowers, using excess cash to invest in their property and pay down debt or to excessively borrow on their equity growth.
Only 19.2% of the total value of Luton property
is borrowed money with a mortgage.
This is great news for every Luton homeowner and Luton landlord because irrespective of whether the ‘Post Lockdown Bounce’ is short or long-lived, it shows the Luton property market is in a better state to ride out any storm that it might encounter than ever before because less people will be in negative equity or have prohibitively high mortgages.
Before I finish, I fully appreciate money and inheritance is a sensitive subject for many families.
My message to all the Luton parents is, just because your children aren’t talking about the subject, it doesn’t mean it’s not on their mind.
The lead has to come from you, as a Luton parent to ensure the wealth held in your bricks and mortar can be used to your family’s advantage, when they need it most.
If you do, your children will thank you for it and they may even do exactly the same for their children, then, they will do the same for their children’s children ... creating a legacy that will go on for generations.
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With grocery, energy and other household prices/costs rising and hitting everyone’s back pocket, inflation (rising prices) may feel like an unimportant issue when it comes to the cost of keeping a roof over your head.
Yet nothing could be further from the truth for many Luton homeowners and Luton landlords.
Because inflation over the long-term is bad for the economy, the normal weapon of choice to reduce inflation is to increase interest rates. The Bank of England (BoE) is in charge of interest rates.
Should inflation continue to rise, there will come a point later in the year when the BoE will need to raise it's Base Rate from its 300-year record low of 0.1%, and probably continue to do so with a series of further increases in 2022.
When interest rates go up, the cost of mortgages go up. When the cost of mortgages go up, that hits the affordability of what people can borrow to buy their homes (and landlords to finance their buy-to-let properties). In essence...
could it be the end of the Luton house price boom?
The danger of a base rate rise by the BoE on the back of a rise in inflation over the last few months has alarmed banks and building societies into increasing the mortgage rates for both home buyers and landlords.
In the last week alone, lenders have increased the rates (i.e. prices) of their mortgages, some mortgages by more than one whole percentage point. That doesn’t sound a lot, until you punch the numbers into a calculator (more of that later).
Luton property buyers (be they landlords or homebuyers) have relished months of cut-price cheap mortgages rates.
Mortgage lenders have played the big game in the last 12/16 months to capture the mortgage business of 1 million+ Brits that have moved home since the end of Lockdown-1 plus the many millions of re-mortgages, with the cheapest mortgage rates falling below 1%.
Yet, the money markets have already priced into their calculations that the BoE will increase the base to 0.25% by December, up from the existing 0.1%. They also anticipate a further two quarter point (i.e. 0.25%) rise in the Spring of 2022, meaning they believe the base rate will be 0.75% by the end of summer 2022.
So why is this an issue for the homeowners of Luton? Looking at the combined totals of the LU1 – LU4 postcode districts…
27,713 Luton property owners have mortgages
totaling £3.35bn (up from £2.56bn in 2013).
Yet, 5,820 of those Luton homeowners with mortgages are on variable rate mortgages, with their mortgage payments rising and falling based on how the BoE interest rate shifts. That will cause instant pain if mortgage providers pass on increased mortgage repayment costs. So how much will that be?
The average size of mortgage for a
Luton homeowner is £121,174.37.
If the base rate were to rise to 0.75%, the average Luton homeowner (with a variable rate mortgage) would be £66 per month worse off (£788 per year).
The mortgage price war the banks and building societies have been fighting recently has resulted in falls in the month-on-month average mortgage rates available to borrowers. The economy is awash with cash looking for a home (mainly down to the Government’s and the BoE’s intervention to keep the UK economy going during lockdown). This has meant, mortgages have been available at less than 1%.
However, with reports of a potential BoE interest rate rise happening soon, those Luton homeowners who are on a variable rate mortgage are probably going to be the first who would feel the influence of any Base Rate increase.
If the BoE Base Rate rose to 3%, the average annual mortgage payment of those Luton homeowners on variable rate mortgages would rise by £3,635 per year.
This could mean homeowners with variable rate mortgages would be spending half their salary on their mortgage should interest rates get up to these levels.
Now the BoE won’t increase rates by that amount over night, as that would spook the market. They will probably increase every few months by a quarter of one percent each time.
Thankfully, over the last 4 or 5 years, over 90% of new mortgages have been fixed rate, yet they are only fixed for a certain length of time. If you have less than one/two years left on your mortgage, you seriously need to take advice now from a qualified mortgage broker, as any penalty to change might now be considerably smaller compared to the mortgage rates you might be paying when your deal finishes in the next 12/24 months. Again, I am not giving you advice in this article – just making a suggestion.
A further message to the 1 in 5 (ish) of Luton homeowners on a variable rate – please take some advice from a qualified mortgage advisor as well. Mortgage rates can’t get any lower and all the signs are showing they will be going up. The mortgage market is still extremely competitive, there is opportunity for borrowers to lock in ultra-low mortgage rates before any likely Base Rate increases filter through.
Will an interest rate hike crash the Luton
housing market like the early 1990s?
The early 1990s saw repossessions go through the roof as homeowners defaulted on their mortgage payments because of the increased mortgage rates. Also, in the run up to the Credit Crunch in 2008, Northern Rock were lending 125% of the value of the property (we all know what happened to them!). Other banks were recklessly lending 8 or 9 times a person’s income, without the person having to prove that income. Both scenarios were significant contributory factors in the housing market crash.
Thankfully in 2014, the BoE implemented the recommendations of its own Mortgage Market Review (MMR). The MMR forced banks and building societies to stress test mortgage borrowers against potential increases of the base rate of up to 3%. Thankfully, even the most hardened monetary doom-mongers aren’t contemplating base rates of those levels (although I won’t apologise for highlighting what it could cost earlier in the article).
Fundamentally, as we go into 2022, the housing market is built on decent foundations, unlike 2007 with the poor lending practices by the lenders. Yet the increase in base rates will have another influence.
The psychological factor of a perceived increase in mortgage costs, might be enough to cool the enthusiasm and excitement of many buyers to pay top dollar for their next Luton home, and that might not be a bad thing. If I am being frank, we could do with something that takes a bit of fizz out of the Luton housing market.
Many Luton homeowners have been put off placing their house on the market because they are scared they won’t be able to find another home. A slight increase in Base Rates will take the frothiness out of the Luton property market and return it to some form of normality. I would even go as far as to say house prices might ease back ever so slightly in the coming 12 to 18 months.
So don’t be alarmed if house prices in Luton do drift slightly over the coming years like they did in the mid 1990s.
It’s just the property market settling down and coming back into some form of equilibrium, which is good for everyone.
My final thoughts...
The mortgage lenders have already priced in the potential BoE Rate rises, so even if rates do rise, let’s not panic. And even if they did rise to 3%, that would still leave them at levels that look exceedingly cheap at any other time in history. Many homeowners in their 50’s and 60’s can remember mortgage rates of 15% in 1992, so take advice from your family. (Interestingly, the 50-year BoE Base Rate average is 7.2%).
Buying your Luton home is a long-term venture. It is a huge financial decision that can give you peace of mind and a superb place to live.
But it is not an investment. I am not saying you should avoid homeownership, however, if you are considering buying because you think you are making a clever investment choice, think again.
The idea that your Luton family home can be an investment too comes from the fact that, historically Luton property prices have risen. We all have stories of someone in the family, somewhere in the UK, who bought a house for £500 many years ago, for it to be worth 300% / 500% / 1000% more today!
If you read some of my past articles on the Luton property market, I have proven many times over, there are much better ways to invest your money e.g. buying buy-to-let properties or stocks and shares.
But if you want to bring your family up in a home that is yours, the bottom line is this. Even if interest rates rise to 3% (if not a little more), you will still be able to get on the property ladder with a small deposit (using the Government’s 5% deposit mortgages) and you will still find it’s cheaper to buy than rent.
If you would like to chat to me about anything in this article, do drop me a line. In the meantime, please do give me your thoughts on the matters raised in the article. I would love to know.
Thanks in advance.
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The ‘Buy-To-Let’ (BTL) mortgage is celebrating its Silver Anniversary (25 years) this autumn.
Isn’t it fascinating that a decision between a group of letting agents and bankers all that time ago to offer BTL mortgages has changed the face of the Luton (and national) property market?
But has it been a good thing? Or has it ruined the dreams of many 20 somethings wanting to get on to the property ladder in the last couple of decades?
Let’s look deeper at the whole story, then I will let you, the reader, decide.
And as soon as the BTL mortgage was launched, it was clear there was an enthusiasm and a need for this mortgage product. So much so the size of the Luton private rented sector has grown exponentially.
According to my analysis …
there are 17,203 private rented homes in Luton,
So now we are in 2021, it seems farcical that banks and building societies once thought that properties rented out to private tenants would not create a steady income or increase in value, yet this thought was conventional back in the 1990’s.
It’s no wonder buy-to-let landlords have been given a hard time, with numbers like this.
Yet before we burn every landlord at the stake,
let’s just look at the background story.
The Conservatives introduced the right of a council house tenant to buy their own council house in the early 1980s. Fantastic news for council tenants, yet when a council tenant bought their home, that meant that council housing was taken away from future generations to rent and therefore eroding the council housing stock available. Meaning from the mid 1990s/early 2000s, people who would normally be eligible to rent from the council, yet who couldn’t buy, had only one option … rent from a private landlord.
Meanwhile, in the early/mid 1990s we had 15% mortgage interest rates, unemployment rates of 9% and the 1989 housing crash fresh in people’s memories. Repossessions were rife, making home ownership not the most attractive prospect for 20 somethings.
Luton house prices dropped by
34.5% between 1989 and 1993.
This meant as we entered the mid 1990s, the Luton property market entered a period of stagnation. There were many Luton homeowners that bought their home in the property boom of the late 1980s who were disinclined to sell their home for a loss. They were in negative equity (i.e. they owed more than what the house was worth) yet needed to move because of their growing families.
Renting their home out could have allowed them to buy another home for their growing family, but most banks and building societies were still mostly unreceptive to the notion of these homeowners becoming accidental landlords. Most mortgage terms and conditions usually included clauses that prohibited homeowners from renting out their homes.
So, with growing demand from potential tenants, supply reduced from the sale of Council houses and many homeowners in negative equity, all bound up by the semi-deregulation of the private rented sector with the Housing Act 1988 – you can see that the BTL mortgage came along at the right time.
Early take up of BTL mortgages was slow in the first couple of years.
By the Millennium, according to the Council of Mortgage Lenders, there were just over 120,000 BTL mortgages, with a total value of £9.1 billion.
Yet as we entered the 2000s, they really took off, with every man and his dog jumping onto the BTL bandwagon. So much so that today in the UK, there are …
4.4m private rented homes, 2.1m of them with BTL mortgages
totaling £234.1bn, which is 11.9% of the UK’s GDP!
That’s more than a 1,650% increase in the number of BTL mortgages to landlords and a 2,470% increase in the value of those BTL mortgages.
Since 2001, the number of privately rented households in the UK has grown from 8.3% to 19%.
On the face of it, you could say with the growth of these BTL landlords with their cheap BTL mortgages and often unkempt properties, it has pushed potential homebuyers into squalor. Yet, let’s look a little deeper.
Most Luton landlords are very fair with their Luton tenants providing them with clean, well presented and affordable housing. Of course, there are the rogue landlords but with TV shows such as ‘Landlords from Hell’, the British public are given a distorted and uneven view of private landlords as a whole.
Private sector landlords have played a critical role in providing homes to millions of Brits in this country, let me expand.