Ray Boulger on the Changing Buy to Let Landscape
Posted on 11 November 2016 by
In the last year a raft of political (fiscal) and regulatory changes have had a significant impact on Buy to Let (BTL) investors and negatively impacted the BTL market. These changes have been made to dampen the buy to let market, and allow more first time buyers and families to get on the ladder – but what impact will they have on those who can’t afford to buy?
Will fewer properties being available for rent cause a surge in rental prices? On that the jury is out, and will be for several years. However we do know that, these moves, plus negative changes to lending criteria, are going to change the face of the BTL and rental markets.
What does this mean for renters?
With the expectation of a lower supply and choice of rental properties which could potentially push up rents, there’s two ways that tenants won’t feel the pinch.
Firstly if fewer people want to rent, though this doesn’t seem likely, especially with the speed at which the UK population is increasing.
The second is that the changes encourage different types of investor to step in, such as housing associations and institutional investors, e.g. insurance companies. These new investors could see this as an opportunity, particularly if the Government forces Housing Associations to offer sitting tenants the opportunity to buy their rented homes at a discount. They could then use the monies to replace the sold properties by building new homes, including some under the new “buy as you go” scheme expected to be announced in the Autumn Statement on 23 November 2016.
Impact on BTL investors
The new rules for the BTL market by the Prudential Regulation Authority (PRA) that come into effect from 1 January 2017 mean that unless your initial interest rate is fixed for at least 5 years, or the mortgage contract is for less than 5 years, lenders must take account of the likely interest rate increases over a minimum 5 year period when calculating their rental cover assessment. The interest rate set by the PRA for the rental cover calculation is a minimum of 5.5%.
To avoid creating mortgage prisoners in the BTL market those looking to remortgage with no additional borrowing are not subject to these tests. However, as most lenders have failed to use the Financial Conduct Authorities’ mortgage prisoner exemption in the residential market, I suspect major lenders will ignore this flexibility. This presents an opportunity for any lender who does wish to use it to set themselves apart.
The new BTL income tax rules from April 2017 will push many basic rate landlords into the higher rate tax bracket. Lenders are currently reacting by increasing their rental cover percentage from 125% to 145%, despite the PRA leaving the minimum at 125%. Although lenders have some flexibility, they must take tax liability into account and could assume that all borrowers are higher-rate tax-payers for this purpose.
Some lenders are using 145% for personal borrowers, and retaining 125% if the property is in a Limited Company, and I expect more lenders to follow. Likewise, as the increased income tax weighs more heavily on landlords, then lenders adopting different calculations at different loan to values is a simple way of dealing with the issue.
Unintentionally these moves have helped those borrowers who own their Buy to Let via a Special Purpose Vehicle (SPV), i.e. a Limited Company. As more lenders have entered this sector, the rate margin between personal names and SPV’s has narrowed, making this option more attractive. Also if you’re looking to maximise your borrowing, then the less onerous rental cover calculations available for SPV’s, plus paying corporation tax on profits rather than income tax on the rental income, have radically shifted the pros and cons of owning a rental property. For more information on this you should seek advice from a specialist tax adviser.
Portfolio landlords could be hardest hit
As result of these new rules, arguably the most challenging problem for lenders is going to be underwriting portfolio landlords. According to the PRA, these are borrowers with four or more mortgaged BTL properties. Although, this doesn’t come into effect until 30 September 2017, even if a borrower is just looking for a single BTL mortgage, if they already have four or more mortgaged BTL properties, then the lender will be required to apply a specialist underwriting approach, and review their whole portfolio.
Naturally, many lenders will find this both onerous and uneconomic, leading to portfolio landlords having less lender choice and hence, in many cases, not being able to benefit from the most competitive deals.
Currently portfolio landlords can often obtain better terms by arranging the mortgage for each property separately, using different lenders, however this is likely to be severely compromised. Basically, less choice, means higher rates.
What should you do if you own a BTL property?
Lenders will continue react to regulatory changes in advance of any deadlines, and although it’s likely to be mid 2017 before they either tighten criteria for portfolio landlords or cease lending to them, borrowers who have a remortgage requirement before then, or who are looking to increase their portfolio, should consult their independent mortgage broker sooner rather than later to maximize the mortgage choices available to them.
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The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.