fbpx

Dentists Who Invest

Podcast Episode

Full Transcript

Dr James: 

What’s up everybody? Welcome back to the DentSume Invest podcast. We have returning guest Tony Hammond with us today. After Tony’s last podcast all about income protection, which really popped actually I’ve decided to get Tony back again today to talk about one of the other skills in his repertoire, which is mortgage. And specifically back to that mortgage how are you, my friend?

Tony: 

Brilliant. Thanks so much for having me back, James. Yeah, really good. Thank you very much.

Dr James: 

Oh, wonderful, my pleasure. Well, something that we’re covering today which is extremely contemporaneous and a hot topic, which is interest rates, because they’re through the flipping roof nowadays and I know that, from the outside looking in, most people have the misconception that that is solely linked to the Bank of England base rate, but actually there’s a little bit more to it which I’m super interested to talk a little bit about today. Let’s start from the start, which seems reasonable Vitalet mortgages. What the hell are they and why are they distinct from other mortgages?

Tony: 

Yeah, sure. Well, the Vitalet mortgages is really investment properties, so second properties, properties that the people, the landlords, will rent out. It could be house shares as well, or houses and multiple occupation, or comes under the same banner. So it’s distinct because it’s not your own primary residential property. That’s really the definition behind it. So that’s the main thread. I do residential properties as well, but there’s a lot more complicated getting mortgages for people to invest in and to make it profitable for them moving forward, and it’s more. There’s more of a minefield to go through coming up as well, because the government have regulated it a lot more and things are getting trickier and trickier On that side. I mean, you’d have seen the news at the moment about how, trying to get the tenants out there, there’s not enough stock in the market. There’s a number of reasons behind that, some of which are landlords that are finally divesting their property because it’s less profitable than it was, because the mortgage rates have gone up, as you mentioned. But it’s just a supply and demand issue as well. It’s causing people a lot of problems and it’s about doing it properly, because there’s a lot of bad press about rogue landlords out there that could have everybody in name and there’s some scams around that. I was listening to Radio 4 this month about how there’s some scammers doing that. They don’t go through a proper lettings agent. They can really catch a cold. So it’s a bit of a minefield, but it’s an interesting one and it’s the one I think. For me, investing in property is not a short term investment. It’s medium to long term. If you’re looking to make a quick buck in a year, I don’t think property is the right thing for you to do. But certainly long term, because you just look at the circle of property, you have the sort of the boom and the bust. What we had in 2008 were properties that sunk, but of people that stuck in there, the prices have gone much higher than they were then anyway. So it affects, as far as the economy is concerned, about how much the capital growth will be. But there’s a massive demand still for renters, even more so than there was probably even a year ago, I think, because it’s such a difficult, because there’s just not the stop on that side of things. So that’s a big part of it. But you mentioned the interest rates, as I think it all where everything started to go a bit wrong and this is not political at all, but I think I don’t think many people disagree, if I can use the phrase. When Liz trust chuck the hand grenade in and the markets went barmy, that was really because the markets were uncertain what’s what’s happening? And the financial markets want stability and as much certainty as they can get. And the reason the the rates went up is because, as we know, inflation has gone through the roof and one of the main ways that the Bank of England try to keep hold of inflation is by interest rates. So if inflation goes up, they put the interest rates up as well to try to curb that spending, to bring inflation down, and that that that definitely works. But it has a knock on effect as well. And then with the, I think because the markets were surprised or caught cold by the hand grenade as such, is that there was a lot of nervousness and what it was around is that it’s not just the Bank of England base rates, as you touched on, it’s the swap rates, which are how the banks, the mortgage lenders, really how they borrow their money. So if they’re going to lend you a million pounds, they want to hedge that to make just to cover that their basis and it’s really because that was uncertain. Then the swap went, swap rates went right up and that’s what’s really been affecting the market since then. So it’s really interesting to watch First time’s happened for a long time that we’re seeing that the Bank of England are increasing, that the Bank of England base rates are what we have fallen a quarter percent now and it’s gone up many a percentage point. And yet over the last few months the fixed rates are starting to come down again. And he said well, why is that? And that’s mainly because of the swap rates that I mentioned that the lenders borrow their money from. So clients that are on a variable rate or the the bank’s standard variable rate, which is, if you don’t have a fixed period or a tie in period, you’ll be on the standard variable rate, which is typically two or three percent more than you otherwise would have been paying. That’s been, that’s been getting, so their rates would have gone up all the time. But people on a fixed rate mortgage are coming down and so that the new rates I can offer now, compared to two months, are actually cheaper, even though the base rates have gone up. Completely opposite and I’ve noticed today I’ve just been notified nationwide or reducing their rates even further as of tomorrow. So I don’t think we’ve. I think the interest rates, the Bank of England base rates, in my view I don’t have a crystal ball I think we’ve probably peaked. I think if you look at the financial press there they’re saying pretty much we don’t know when it’s going to start to come down from that plateau that I think we’re going to be on for a while. But I don’t think we’ve necessarily got to the bottom of the fixed rates coming down, which is good news for people that are wanting to invest, especially in buy to let property, because that’s really caught people out. I was happy for me just to continue Because I was looking at some figures which I thought might be useful to people that, looking at just 12 months ago, when I was doing buy to let’s for investors, you’re, if we just say we had 100,000 pound mortgage with an 800 pound income and it’s a higher rate taxpayer, which is most dentists You’re probably looking at around about 2%, 1.992%, which is your, your typical interest rate. You were getting on a fixed mortgage at that time. You look now that’s gone up to 4.5%, 5%, depending where you’re at. So, on the mortgage, to. What does that really mean then? So on 100,000 pound mortgage, that would have been about £166 per month. That’s now more than doubled to 375. So the annual profit the year ago, for that example, there would have been about 3,800. For 100,000 mortgage, that’s now dropped to 1260. So the costs to landlords have gone up massively and they can’t always pass that on. So they’re looking at rate increases. But you can only. You have to be reasonable, I think is the legal term about how quickly and how often you can put up the rent to people. There’s only so much people can take with the cost of living crisis. So landlords are in a pretty sticky place at the moment because there’s been some big changes and the profit has drastically reduced. So it’s then when the landlords are coming up to the renewal of their mortgages. I think they’re looking. I’ve done loads recently where it’s more than doubled and you can’t more than double your rent. So it’s what do they do about that? So they’re marginally profitable in a lot of cases, sometimes loss making. And then when you look at I’m sort of diving around a bit but the changes to come for landlords around EPC, so the energy performance certificate, as you may know that in 2025, all new tenancies have to have an APC at an EPC rating of C or higher. So they’re looking at the green element of it. So the insulation, leds, all these sorts of things, is a greener house rather than some of the ones that are quite often sort of an F. So that’s new tenancies by 2025. So landlords have to adapt their current properties if they’re going to rent them out after 2025. Again that they’ve got to get the EPC to a C or above. And then all tenancies, whether the tenancies have been in their 20 years, have to be higher than a C by 2028. And that’s not that long. And there will be a lot of landlords thinking, well, what have I got to do to get my property to that standard? And some of them thinking the mortgages are now doubled. I’ve got all this extra work I’ve got to do to make my properties compliant. There’s a lot more legislation in letting a property that you’ve got to make sure that you get right, because if you don’t, you catch a cold. People may not know that little things like smoke alarms and carbon monoxide have to be replaced regularly, not just have one, and there’s all these rules of changes that people have to keep top on. So there’s a lot of landlords out there now that are looking to sell some of that. They’re sort of the less profitable and the older properties because of the EPC changes that are coming to market. So it’s a really interesting time. But I also think that longer term property will outperform the market. So stocks, shares every time round. But you’ve just got to tighten your belt and, like with any business, you’ve got to make sure what’s most profitable for you and you’ve got to change and adapt, and I think this is what’s driving the buy-to-let market at the moment. I’ve mentioned some of the regulation changes. So the FCA, so the Financial Conduct Authority they now have a minimum requirement is that lenders stress their lending at 1% above their standard variable. So the standard variable rate is that rate that everybody’s on if they don’t have a fixed or a tie-in period. And they sort of did that around where there were a lot of repossessions going back in 2008 and things like that where people could self-certify their mortgage and couldn’t afford to pay. So there’s lots of repossessions and so it makes getting a mortgage more difficult, but it then protects the clients as well. So what they’re looking at is okay, it’s affordable today, but if the interest at the end of your fixed period the interest rates were to go up, is it still sustainable for you? Can you still afford it? So it’s stopping those repossessions or reducing the amount significantly. So that’s an FCA requirement of all lenders. They now have to do that. So that’s the residential properties, for the guidance for buy-to-lets is even more complicated than that, and I think buy-to-let landlords have been hit the hardest, mainly because the majority of them are on an interest-only basis and so therefore, they see the biggest increase when the interest rates change. So it can come back, keep coming back to that marginal profitability for a lot of properties now. So some of the other big changes that have happened that most landlords on here will be familiar with. So back in April 2017, through to April 20, the level of tax applied to rental income. It used to be that previously, landlords only paid the tax on the rental profits after the mortgage interest had been taken out so they could offset it. As from April 2020, the rental income is now taxed before the mortgage interest is deducted. So a massive difference there. Some people’s property portfolios went from being very profitable to unprofitable overnight just on that element alone, and so the level of tax that people pay is obviously dependent on whether they’re a higher rate or a basic rate taxpayer. So typically the 40% or 20%, or see, there’s the higher rate, but this has then been factored, so one of the changes into the buy-to-let market. This has been factored into what they call the interest-cover ratio, or ICR as it’s known, and this is where. So the gross rental income, so confirmed by the value they send a value out, if you’re going to purchase a property or remortgage, it must cover the monthly mortgage interest payment by at least a set percentage. So it’s got to wash its face is the language that I use and it varies depend on whether you’re a higher rate or a lower rate taxpayer. So for a buy-to-let property, if you’re a lower rate taxpayer, your mortgage or your rent has to cover the mortgage by at least 125%. If you’re, then a higher rate taxpayer, then it has to cover at least 145%. So it’s more difficult if you’re a higher rate taxpayer to get the. You have to have more rent to cover the mortgage. Sometimes, if you’re with houses in multiple occupation or a house share which have what you want to call it, you then got to that’s got to be 170% of the mortgage. So it gets more and more difficult. And one of the other things people may not be aware of even if you’re a basic rate taxpayer, if you have three or more buy-to-let properties, you’re considered what’s called a portfolio landlord. A portfolio landlord, the sum lenders out there. They don’t want to touch you anyway. There’s plenty that do but the sum that won’t. But then even if you’re a basic rate taxpayer, all of your properties have to be at the 145% interest cover ratio and that’s on the whole portfolio. So if they’ve got 20 properties, the whole portfolio has to be at 145%. So are you getting enough rent to cover your mortgage? And then some is really what it’s all about. So it’s making mortgages more and more difficult. And especially when you look at with the income, the rental income. Like TMW we’re one of the big players in the buy-to-let market they take 75% gross of your rental income and they add it on to your other income. So you know it’s a dentist, what they earn, the salary and dividends. And if it takes you over the 50,000, including the rent, if it takes you over the higher rate threshold, which is currently 50,271, you’re on the higher rate anyway. So it makes it more difficult all the time to do that. And then, alongside the interest cover ratio, the ICR, the PRA, which is the Prudential Regulation Authority, because banks have two regulators looking after them lucky them. They also require that all lenders use an interest affordability stress rate, which is something else that we’ve got to look at when we’re looking for mortgages.

Dr James: 

There’s a lot to this. Ah, there is it’s not just straightforward.

Tony: 

You know the days are gone where you could just go to your bank and say I want a mortgage.

Dr James: 

There we are. Anyway, sorry I interrupted, but listen, there’s a lot to it, but it’s good we know, because otherwise we don’t know what we’re getting into.

Tony: 

Yeah, and I just thought it’d be helpful to people understand. I don’t want to get too technical about it, but it’s just really to say that there’s legislation that’s making things more difficult and if the rates rise at the end of the fixed deal, the rental income still has to cover the mortgage payment plus a buffer, and that’s what the stress rate’s all about. So the ICR, the interest cover ratios for taxation, the stress rates are all about affordability. So we’ve got to make sure that clients can do that and that there is, whether it’s a two year or one year, or two year or five year. That makes it different, which is weird, but it is. It’s more expensive at the moment for a monthly payment to get a two year than it is a five year.

Dr James: 

So the fix With shares that they think interest rates are going to go down right Basically, that’s another way of them saying that right.

Tony: 

Sure yeah.

Dr James: 

There’s an element.

Tony: 

And I think they certainly will in time. But you and I, when I talk to clients, it’s one of the questions I’m asked a lot. Do I go for a two year or a five year, which are the two vast majority of them? There are others that say you can go for one year or a 10 year, but the vast majority are two or five. It used to be quite a straightforward question but now it’s so difficult because do you know what the market’s gonna be like in two years’ time? Do you know where interest rates are gonna be, especially what’s been happening over the last six months? Or in five years? So there’s that level of uncertainty. But people don’t want to be paying more than they need or when interest rates are coming down, they want to benefit from that. But it’s really trying to get that balance, which is a really tricky one for people. But there’s lots of calculators out there that we use as brokers to say well. Clients say well. I asked them how much the rent is and they said how much rent do I need? And there are calculators out that work that out. So HSBC, for example, all they’ll look at is the rent how much rent do you get for that property or whether they’re willing to lend. There are other lenders out there that want to make sure you have a minimum income so you can cover voids, but others don’t. So everybody’s different, which makes it so complex to know what the right deal is. There’s and I’m going off on one here, but there’s some other really clever bits of software out there, because a lot of people may not be aware that even the affordability criteria that lenders use varies massively. So, for example, especially if you’re self-employed so HSBC, for example, use the average salary plus your share of profits after tax. There are other lenders that take your average salary and share of profits before tax. There are some that just look at profit after tax and the last one there are some, like Halifax, for example, that just looks at salary and dividends. Now how do you know which is the best one for you? And it can be so difficult to work out. So there’s a bit of software that I, as a broker, have that you put all of that in, so your client’s particular circumstances and how much mortgage you need. Then it goes through to the affordability of every single lender out there or 60, 70 of them, pretty much everyone you’d want to use and it tells me how much they’re willing to lend. So for the same client, I’ve seen hundreds of thousands of pounds different. So it depends on how you take your money. If it’s salary and dividends, I say with the Halifax they would pay out a lot less than for some others. If you know, if we’re looking, if you’ve got a good average salary and the share of profits because Halifax don’t take profits into consideration, so it’s really interesting. So if I’m sat there as a dentist that likes to invest in properties and I think, okay, I’ll get another mortgage, the world has changed. I would strongly recommend you speak to a broker, preferably a whole market broker, so they can see every lender out there and they have these tools available to them, because a lot don’t and you think, well, I’m not getting enough money based on this. Well, because of some of the reasons that I’ve mentioned, there’s some really clever tools out there that can really maximize how much you can get, but there’s legislation around there that says you’ve got based on your rent. It’s got to wash its face by that particular percentage that I’ve gone over. It’s not straightforward, is it?

Dr James: 

There’s a lot to it, but that was full of gems, the things that you were talking about just then. So a whole of market provider is the mortgage broker equivalent of an IFA versus an FA.

Tony: 

Yeah, yeah. So if you go into your bank, let’s say you put any one of the questions, it doesn’t matter, and you talk to them about mortgages, they can only talk to you about their selection of their products and mortgage. They can’t talk to you about anybody else. Yeah, yeah, yeah, yeah. If you speak to a broker, especially a whole of market broker, they can then compare that bank with everybody else’s. And that really helps, especially around remortgaging, because there’s a lot of remortgaging going on all the time and that won’t change, because people are coming to the end of their deal and if they don’t do anything, they’re going on to the standard variable rate, which is two or 3% more. So you can’t have that happening and there are millions of people on the residential side that are caught in that trap. By the way, but certainly if you’ve got a buy-to-let mortgage, at least six months before speak to your broker. Don’t leave it to two or three months, because what we can do, we can look at the market, we can lock in the best rate today and rates are changing daily, as I mentioned earlier on Nationwide. I drop in their rates tomorrow on certain parts of the product you can lock in the rate today, let’s say your mortgage doesn’t come to an end until another six months. If interest rates go up again, you’re still locked in at the lower rate. But if they drop below where you are, we can switch you down.

Dr James: 

Oh, okay.

Tony: 

Nice. It’s best to both worlds Certainly is. But only a broker can do that for you, and there are some lenders out there that you can do that up to a year before because they’ll give you six months off. The offers last for six months and then you can renew it anyway. So you can do it up to six months before. So you’ve got to be really savvy on this, Don’t leave it to the last minute. The lenders, let’s say I look at a client’s mortgage and it’s best to stay with whoever their lender is. That’s really easy. It’s called a product transfer and it’s almost of a press of a button if all your financial systems stay the same. But what a good broker would do is look at your current provider but then also compare that to the rest of the market and if there’s a cheaper deal elsewhere, they then switch you over. So you’re always on. So all my clients are always on the best. Because I’m a hold of market, I can guarantee they’re on the best deal possible for their circumstances and we make sure every time that that remains the same.

Dr James: 

Tony, I can feel your flippant passion through the screen there. It comes from here, bro, and it’s great. It’s great because it actually can be hugely impactful to people’s lives. Here’s the thing. Here’s what I see all the time. I see people who especially dentists, who have a little cash, a little bit of cash building up in their bank account. Ok, they think themselves OK, I probably should probably do something about that money, but let me just finish this root canal, let me just finish that extraction right. Six months later, come back to that. Part of money is gone. She probably do something about that, but let me just complete this filling. And so the process goes on. And then eventually they get to the point where they just think, hey, I’ve heard properties, good, my mom or dad told me properties, good, let’s get a battle, that, something like that. Maybe they’ve got their first house already, so they kind of just dabble in it. You know what I mean, right? Do you think there’s still space for that or scope for that nowadays? Or do you think that the people who actually do well nowadays are pretty much exclusively the people who dedicate themselves to it? And what I mean by specifically? What I mean is buying by the properties and entering the property market. Do you think that there’s still a space for the novice to just go and buy a house and do well?

Tony: 

Yes, absolutely, as long as they get good advice. Oh, ok, speak to a broker for the reasons that I’ve mentioned. You know you may not be aware that the changes in the energy performance certificates coming up If you buy a house now that’s compliant, but let’s say the EPCs and E or an F, you may not be aware that you’ve got to make significant changes, could be rewiring. You know that to get it to the level that it needs to be. Yeah, you’ve got to look at that. So a good broker will talk you through that process. But it really starts at have you got a deposit of 25 percent? That’s your starting point. Any less than that, there are some available, but it doesn’t the return on investments not worth it. So I would always advise my clients have at least 25 percent. The more deposit you have, the better the rates are, because it’s based on risk profile and typically each 5 percent bracket. So 75 percent mortgage will be more expensive than Well, sorry, the 70 percent mortgage will be more, will be cheaper than the 75 percent mortgage. And each 5 percent you go down it gets cheaper and cheaper because from the lender’s perspective, their risk has gone down, because they know they’ve got the security and the property and they can get the money back if they had to repossess. So minimum 25 percent and then you can just have one property. But you then going to want to ask somebody well, do I have that my personal name or do I put that into a limited company? What’s right for me? And you’d have probably heard the phrase of most of the clients. Will you know an SPV, a special purpose vehicle, which is a limited company designed for investment properties? It’s got to have the right Dutch or classifications to make that happen, because that stress rate on that is only 125 for a limited company, 125 for a limited company rather than 145. If you have so there’s lots of things to do. So, yes, you can just have one property. See how it goes. Look at it as a medium to long term investment. Think about what you’re going to happen. What happens if you have a void? You haven’t got tenants in? What happens if the boiler goes? Am I still going to be profitable? Have I got the money to do that? But yeah, I would definitely. I personally would still have. There’s lots of people I talk to that their, their pension is in property and, I think, long term, compared to some of the pension funds. I think if you can do both, so diversify. That’s probably the number one rule of financial advice. Certainly was when I was studying diversify. I don’t have all your excellent basket, but you can do lot worse than have your money in property. And then the last point on that, sorry, just as no no, it’s cool. No, it’s cool. On that point of diversification, I’ve had many clients that they’ve got this great house and it’s quite a big house. But rather than buy a big house, why not buy four small ones? Because you’re spreading your risk. Then you still need a similar deposit, so 25% to each one, but you can then reuse the money. You can do it up and then a year later, you can remortgage because the prices have gone up and you can take some money out because you’re still keeping the loan to value at 25%. There’s lots you can do it when, if you just start with one big one, I would suggest that you look at taking multiple smaller ones. Would be is the advice that I often give as well.

Dr James: 

There we are and one important thing to mention, if my understanding is correct, that when the property is owned within the company, then it’s more tax efficient from the point of view that the interest on the mortgage is also paid pre-corporation tax, which makes it more tax efficient, if I’ve understood correctly.

Tony: 

Because you’re looking, is corporation tax cheaper than your income tax? Yeah, and again, I’m not a tax advisor. I can’t give tax advice, so I’ll always speak. I have to say this speak to somebody that is qualified in offering tax advice, not the guy down the pub. For some people it’s better, for some people not. So depends on what you want to do with it. So I think it’s a bit like a. It depends, is the question. But because just look at the stress rates alone the stress rate for a limited, any property in a limited company is at one two five, even if you are a higher rate taxpayer. So it’s one two five versus the one four five. So you don’t need as much rent necessarily, so you can make some properties work where they otherwise wouldn’t. So it’s not a black and white question. I’m afraid it does depend.

Dr James: 

Gotcha. There’s a little more to it, as we’ve learned. There’s a flippin’ lot to buy. A lot of properties isn’t there. There we go, especially the mortgage side of things.

Tony: 

I think if most people listening today just remember one thing because I’ve gone into some technical stuff and most people aren’t interested in interest cover ratios and things like that and stress tests it’s just speak to a broker, because it is a complex world and we can do all of that work for you and advise you in the right way Cool, tony.

Dr James: 

What a nice note to end the podcast on today. Thanks so much for your time, much wisdom espoused. Looking forward to get you back on the Dennis Vest podcast very soon. My friend, speak soon, thanks so much. Thanks, james.