The new buy to let mortgage market

Why your capacity to borrow as a landlord is shrinking

Exploring how a buy to let investor buying a property valued at £250,000 with £1,000 of rental income will find themselves needing to find another £44,000 in cash to make the purchase.

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Key Actions for Landlords

  • If you need extra buy to let lending get it now at whatever rate you need to, as capital raising will be more difficult in coming months. (Like for like re-mortgaging should be unaffected)
  • Consider holding your buy to let properties via a Limited Company as it may provide some solutions for you.
  • Think carefully about your key objective? Is it income now, capital growth, or future income? (Planning is key)
  • If you already have three buy to let properties, get your further purchase targets secured now


Buy to Let Changes – the detail

Pre 2016

In the good old days, getting a buy to let mortgage was a straightforward affair for both the borrower, and the lender.

The both lender’s and the borrower’s concern was to make profit whilst minimising risk.

If the value of the property gave lender the security they wanted then it was a simple question of ‘will the expected rental cover the payments on the lending’.

Lenders had a simple way of establish a simple rental target to validate the lending.

Whilst credit history affected available lenders. Personal income made little difference to anything except perhaps a requirement for a minimum income level of £25,000.

Things were so simple, and buy to let mortgages were not even regulated.

Taxation was fairly straightforward. The landlord was treated as a business allowing them to offset the cost of their lending against their rental income before arriving, after other costs, at a net income on which tax was paid.

A purchase led to a stamp duty charge in the same way as a residential purchase, and a sale carried a potential capital gains tax charge.

The times they are a changin’

In recent times, the Government – through their agencies the Prudential Regulation Authority, the Financial Conduct Authority, and Her Majesty’s Revenue and Customs, have been taking a much closer interest in the buy to let market and buy to let mortgages.

Change one

A sting on purchase costs with a higher rate stamp duty land tax rate costing buy to let purchasers an extra 3% on the way in.

Change two

A sting on net revenue with mortgage interest offset against tax at base rate only, particularly painful for higher rate taxpayers.

These two changes alone have made the buy to let market, less profitable, and more difficult to enter. But it doesn’t end there.

Change three and beyond

The Prudential Regulation Authority is now insisting on a series of underwriting standards that buy to let lenders must adhere to. These rules are coming in over 10 months from January 2017.

It is no longer satisfactory for the lender to make a simple calculation on affordability.

Buy to let mortgage lenders must now consider all the costs that borrowers incur when running their buy to let including:

  • management fees
  • letting fees
  • licences
  • council tax
  • service charges
  • repairs
  • rental voids

Lenders also need to consider the borrower’s tax liability in view of the changes to mortgage interest tax relief phasing in through to 2021.

Lenders will need to stress test a deal at a rate of 5.5%, regardless of the rate actually being charged to the borrower.

Lenders are either going to be increasing their interest ratio coverage (from 125% to 145% for example), or running a full personal income calculation to underwrite buy to let mortgages.
A personal income calculation will consider living costs and credit commitments.

A property yielding £1,000 per month in rent which would have supported £244,275 lending in 2015 we would expect to support just £150,470 of lending by 2018, a drop of close to 40%.

Those borrowers with four of more buy to let properties will be considered portfolio landlords which will incur an additional list of specialist underwriting standards. This suggested list of standards will include items such as how much experience the borrower has as a landlord, and the leverage on their current portfolio.

New complications mean mortgage brokers will be indispensable

All of these changes make the buy to let mortgage market considerably more complex and the opportunity for a borrower to make a simple decision from a list of products practically non-existent.

Most buy to let investors use a mortgage broker to help them obtain funding on their properties, a few still go direct to lender.

These changes to the buy to let mortgage market mean that only a competent and experienced mortgage broker will understand all of the borrower’s options across the market.

Only an experienced buy to let mortgage broker will be able to negotiate the nuances in underwriting that will put obstacles in the borrower’s path.

Only an experienced mortgage broker will be able to help the borrower to the avoid unnecessary costs and frustration of aborted mortgage applications.

As these changes in the buy to let mortgage market are phased-in, the landlord will need to keep their Accountant close, but perhaps keep their mortgage broker closer.

Exclusions

Exclusions from the new regulatory environment include:

  • Like-for-like re-mortgages (unlike in the residential mortgage market)
  • Consumer buy to let customers (consumer buy to let is lending on a property that has previously been occupied by the borrower and/or his family)
  • Consent to let applications (existing residential deals where the property is now being let out)

How did we arrive at the figure of an extra £44,000 to make a £250,000 purchase? Previous lending of £187,500 at 75% loan to value will be reduced to £150,470 under the new rules. This leaves a gap of £37,030 in lending topped up with an extra 3% of stamp duty land tax (£7,500) equals £44,000.

Experience tells us that mortgage lenders use a broad brush with regulation so do not be surprised to see some Lenders ignoring these exclusions and running all buy to let application through the new regulation process.

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Further information on Buy to Let Mortgages

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