It has been a tricky ride for buy-to-let mortgages in the recent term. Last April’s stamp duty increase and tougher affordability rules, which came into effect on 1 January, have instigated a sharp fall in the number of buy-to-let mortgages on offer.
Toughening up
The increased stringency for underwriting standards and affordability checks was introduced by the Bank of England’s Prudential Regulation Authority in January to ensure that borrowers are capable of meeting mortgage payments in the face of rising interest rates. According to
What Mortgage’s Stephen Little, “lenders will be required to set a minimum borrower rate of 5.5% during the first five years of a buy-to-let mortgage contract when assessing affordability.”
Annual rent increases of 2% will also need to be considered when determining whether a landlord can afford a property. “Portfolio landlords with four or more rental properties will be subject to stricter checks on income and debt from September,” he says.
A number of lenders have increased the rental income that a landlord must earn relative to their mortgage costs over the past year. “The standard interest coverage ratio was 125%,” however “many lenders have now raised this to 135% or 145%,” causing landlords to up their rents, or, alternatively, reduce their mortgages.
What Mortgage article
Activity levels slow
Market activity has experienced a particular slowdown over the last month, on the back of the UK Government interventions. The latest
Moneyfacts UK Mortgage Trends Treasury Report highlights that 74 buy-to-let deals have been withdrawn from the market in a single month – marking the biggest reduction since March 2009. According to Moneyfacts data, the number of products available now stands at 1,408, reaching availability levels that have not been seen since last July, when there were 1,402. This has caused many providers to retreat from the buy-to-let market.
Moneyfacts' Charlotte Nelson blames tougher affordability checks: “This could also explain why the 75% loan-to-value (LTV) sector has seen the largest reduction in product numbers, falling from 606 to 540 in just one month, with the new rules reducing the amounts landlords will be able to borrow.”
Tax on income from property rentals is also key, with major changes to the taxation structure occurring in April. “Lenders are perhaps withdrawing products to get back to their 'core' range as they wait and see what other providers will be doing in the run up to April,” she says.
The uncertainty that lies ahead could be a “lethal cocktail for landlords” and sound financial advice will be an essential tool to help navigate the market.
Moneyfacts article
Options for landlords
It is, of course, too early to determine the precise effect these crackdowns will have on the rental market, but
Invezz’s Mark Burns provides some insight into the paths landlords may take. Shorter-term fixed rate deals, or variable rate mortgages, can be used, as long as landlords can demonstrably cope if interest rates rose to 5.5%. Others, who may view a “worst case scenario” of 5.5% interest as unrealistic in light of the current environment, have two options: “One is to sell any existing properties and move into another form of property investment and the other is to look for fixed-rate deals of five years or more.”
125%
The standard interest coverage ratio for buy-to-let landlords
These deals are “somewhat riskier for lenders” as “they tend to have higher rates, thus making them superficially more expensive.” However, remortgaging is very comparable to the initial mortgaging process, and therefore a lot of the same expenses are involved. “Landlords on two-year deals would have to remortgage 1.5 times over the same five-year period and absorb the associated costs.”
So, these changes could turn out to be “something of a storm in a teacup,” having a small, or even no impact on landlords.
Invezz article
Large versus small scale
So how are smaller scale landlords set to fare in comparison to the larger players in the market? Sarah Davidson of
This is Money says: “Landlords with just one or two buy-to-lets are likely to see mortgage rates cut in 2017, but professionals with larger portfolios may find they are forced to pay more.”
Analysts at mortgage broker John Charcol predict a buy-to-let mortgage rate war in the ‘vanilla’ end of the market, as larger high street lenders “drop rates for smaller scale landlords with lots of equity, who they consider lower risk.”
However, intense competition for smaller private landlords is not expected to extend to professionals – “in fact, landlords with more than three buy-to-lets may even see the rates on offer from high street lenders start to climb,” the broker says.
While there will be more choice for smaller landlords, Charcol’s Simon Collins does see hope for portfolio landlords wishing to borrow next year. “We could see further changes to rental calculations throughout 2017 as lenders assess what impact their different calculations have on their ability to attract new business. And we could also see other lenders taking a bigger slice of the pie away from the old favourites.”
How this plays out remains to be seen.
This is Money article