April 2020 – Page 2 – Ditch the High Street Agent

In property, its hard to get far without coming across the term “LTV”. LTV stands for “Loan to Value” and is something every property owner should fully understand, regularly calculate for themselves and use this knowledge to make strategic decisions which optimise the financial performance of their property/(ies).

I sense a few red faces in the virtual blog room. A tentative hand creeps up. A nervous cough. “Erm, so remind me what LTV actually is”.

Well guess what, despite LTV being a common acronym that most property owners will have an awareness of (I hope!), its usually not fully understood, and is definitely not being used as a money making tool – as it should be.

I’m hoping I can help with that…

Lets break it down

Let’s start with an official property related definition from www.moneyexpert.com:

“The loan-to-value is the ratio between the value of the loan you take out and the value of the property as a whole, expressed as a percentage. The remaining value is paid as a deposit.”

Calculating LTV is fairly simple; just take your mortgage amount, divide it by the value of the property and then multiply the result by 100 in order to get its percentage value. As with everything in life, a numbers example makes this much easier to follow:

Say you own a property worth £300,000, and have a mortgage £240,000. Your LTV is 80% since £240,000 / £300,000 x 100 = 80%. Job done!

If in 5 years’ time, your mortgage is now £200,000, and your property is worth £325,000, what is your LTV? Well LTV would be £200,000 / £325,000 x 100 = 61.5%.

How about in another 15 years when your property is now worth £400,000 and your mortgage is fully paid off? Its 0%! You’ve paid off your mortgage so fully own your property – nice one 🙂

ACTION: Calculate the LTV for your property. And if applicable, compare this to what it was 1 year ago, 5 years ago, and when the property was purchased. If you own multiple properties, calculate the LTV for each of your properties individually, and also as a portfolio (combined mortgage amount / combined property value).

Ok I’ve got it, so why does it matter?

Well firstly, this is the key metric Banks will look at when considering whether to offer a mortgage.

Banks use the LTV to determine their risk. Think about it, you are asking a Bank to lend you money. How do they know if you will be able to pay them back? What if you can’t? They want to know their loan to you is secure. They have collateral. You have skin in the game.

Let’s jump back to the previous numbers to demonstrate this. In the first case, the Bank provides a loan of £240,000. This is secured against a property valued at £300,000 (so 80% LTV).

Let’s say you default. Does the Bank lose any money? In theory no. Because the Bank can take possession of the property and sell this for £300,000 to recover their cash. The fact its worth £60,000 more than the loan means they could sell it quicker and access the cash sooner. They also have a buffer in case property values drop – in this case the property could drop £60,000 before they made a loss.

How about if on the same property you had a mortgage of £280,000? That’s a LTV of 93%. Yes, the Bank is still covered, but they’d be more nervous lending to you right?

Well that’s the key point. The more nervous they are about lending to you…guess what…the higher your interest rate will be. A higher LTV means more risk, which means higher interest. Stop and think about that, and make sure you follow.

So how can I use this to my advantage?

Firstly lets consider two common questions: Is a lower LTV best? Is there a perfect / optimal LTV? No and No again. The answer depends on individual circumstances, including factors such as:

Your current mortgage deal
Your attitude / comfort level with debt
Your cash available / need for cash
The performance of your property and any other assets

For example, lets say you have an LTV of 80% (property value £300,000, mortgage £240,000) and pay a fixed rate of interest of 3%. Lets also say you have £15,000 cash in a current account earning you 0.0000000000001% interest (thanks Lloyds Bank!). If you are able to remortgage and can get a better interest rate at 75% LTV (if you use the £15,000 to pay down mortgage you only require a new mortgage of £225,000), then that LTV could be a good thing for you to do.

However…if you need that £15,000 cash for something else, or can invest that at a better rate than 3%, then paying off that mortgage may not be best. Too many permutations to cover all, but you get the point!

So what can I actually do then?

Here’s some practical tips that I’d recommend you consider. Call it strategic planning to optimise the financial performance of your property if you are feeling fancy.

Note: This is not financial / investment advice. Its just things to think about – please ensure you discuss any decision with a professional advisor.

Read the below bullet points and determine if any of these apply to you, and if so, if you could financially benefit from actioning them.

Have you reached a lower LTV by paying your mortgage off over the years? If so, could you now remortgage at a cheaper interest rate?

Have you reached a lower LTV by way of your property value increasing over the years? If so, could you now remortgage at a cheaper interest rate?

If you have surplus cash, or are paying a higher interest rate, can you use that cash to pay off your mortgage quicker, reducing your interest payments?

Can you increase your LTV? Yes, can you remortgage with a higher loan, and deploy the excess cash in a higher returning asset?

If you own multiple properties, are you able to transfer cash between property mortgages to access cheaper net interest payments?

Stress test: If shit hits the fan, like COVID-19, how well prepared are you (debt / LTV speaking only here): If your property value fell 20%, what would your new LTV be? If your average interest rate increased 5%, what would your new monthly mortgage payments be?

I hope you find this useful and can benefit from it. Would love to get your thoughts on LTV, even if its just to say WTF! Good luck 🙂

Even before COVID-19 changed the World as we know it, if you were to walk down any High Street in the UK, you’d expect to see a few things: A Pret, a charity shop, a £1 store (actually, probably a few of these) and of course…an Estate Agent.

High Street Estate Agents are part of our culture. As a Nation we are obsessed with property. Everyone will have dealt with Estate Agents in their lives as they help the British public buy/sell or rent property. They are a familiar sight, with their typically plush offices, smartly dressed agents and shiny mini-coopers ready to whizz you off to viewings. And whether you like them or not, lets face it, we all like browsing the adverts in their store windows.

But alas, I fear we may not see the traditional UK High Street Agent for much longer. And whilst COVID-19 may prove to be the final nail in the coffin, their business model has been in decline for quite some time.

Here’s 3 reasons why….

1) High Street Woes

Growing up, a trip to the High Street was a real treat. Shops, cafes, buzzing atmosphere. You name it, the High Street provided it.

Anyone experienced that recently? Nope, didn’t think so. Every second shop is now boarded up. They resemble ghost towns, a place you quickly hurry through on your way home from work for fear of someone seeing you there. Oh the embarrassment. Why shop on the High Street when Amazon can deliver something right to your door which is cheaper, better quality and in less time than in takes to make a cup of tea?

“Last year 284 independent high street estate agents closed their doors, making it the sector with the highest number of closures followed by newsagents, women’s clothing, fashion, delis and hairdressers.”

Well spare a thought for the endangered High Street Estate Agent, who’s home is well and truly stuck on the High Street. Locked in to paying high rents to secure the most impressive spot on a deserted street. When it comes to Business, we’ve all heard the phase “Location, Location, Location”. Well for the High Street Agent, Location was once their key selling point. Its now their nemesis.

2) Technology

Technology is great. We all use it. We all benefit from it. We are all probably negatively impacted by it (ever found yourself mindlessly scrolling through Facebook feeds?). And the property industry has certainly not escaped the Technological evolution. Let me focus on two key areas impacting High Street Estate Agents – for both I don’t even need to explain why these Tech changes are driving High Street Estate Agents out of business:

Online searching. If you want to move house (buying or renting), do you a) wander up and down the high street in the rain trying to find an estate agent window to look in, or b) jump onto Rightmove, add your search criteria and find suitable properties in a matter of minutes? (HINT: Tick the second box).

Online competition. SPOILER ALERT. You can now buy/sell or rent property entirely online. There is no longer a need to use a High Street Agent! A whole host of online estate agents have popped up (Howsy, OpenRent, Makeurmove to name a few). These can provide all the services a traditional High Street Estate Agent can offer (yes, even viewings) at a fraction of the price. You can even tailor your package to pick the exact services you want. Please read to the end of this post before you jump over to google to signup with these online agents!

3) Lower Revenue

Imagine any Business being told by the government that they are now no longer able to charge a significant chunk of their fees to customers. That’s what the tenant fee ban did last year to Estate agents. No more tenant admin fees, or contract fees, or referencing fees or any of the other fees they used to gleefully skim off tenants. How did Estate Agents react? Well some of these lost tenant fees they pushed to Landlords (don’t get me started!), but reality is, they have just had to accept reduced Revenues. That’s a bummer.

The list of nails could go on: Arguably, and in my experience, their service offering has gone down (I’ll save that for another post). A whole host of new Tax & Regulations in the property industry have made Business conditions more challenging and there’s even this thing called Brexit which everyone has forgotten about these last few weeks (can’t believe I got to this stage of the post without mentioning it) – all of which are nails that are firmly closing that coffin lid. But by now I think you’ve got the point.

So let’s jump to the humanitarian and economic crisis that is COVID-19, where Government enforced Lockdown and social distancing rules means no property sales, rentals or even viewings. Yes, Government financial support can hopefully cover furloughed staff costs and provide loans to keep High Street Estate Agents afloat for a few months. But its fair to say that losses and financial hardship for Estate Agents are inevitable over these coming months. Add this to their pre-COVID-19 challenges/struggles, and I simply can’t see many surviving this latest setback.

But wait, let’s not leave it on such a negative note. Is there a glimmer of hope for the High Street Agent? I believe there is. In fact, some (not all) could even stand to gain from the numerous challenges I’ve set out above. Who? How is this possible I hear you say? Stay tuned…I’ll be posting a High Street Estate Agent survival plan to this blog soon 🙂

Stay home. Stay safe!

Louis

Month: April 2020

WTF is LTV?!