Tag Archives: buy to let

Two months to buy-to-let regulatory deadline

 

Landlords brace themselves for more regulation and mortgage brokers expect an influx of new buy-to-let mortgage applications before the deadline.

Some time ago, the Prudential Regulation Authority (PRA), part of the Bank of England, announced that it will start to enforce stricter rules for lenders who are assessing a new buy-to-let mortgage for a landlord who already has four of more properties. The PRA gave a deadline of 30th September 2017, which is now approaching.

An ideal time to review your buy-to-let mortgages

The CML reported that there has been a slight increase in loans taken out on fixed terms of 5 years or longer, which are exempt from PRA stress testing requirements coupled with more bespoke underwriting criteria based on a variety of factors which may include property characteristics, the landlord’s existing portfolio, and the landlord’s tax bracket, in addition to standard interest cover ratio thresholds. CML expect to see £35 billion in buy-to-let mortgages in 2017 and £33 billion in 2018.

Henry Knight, Managing Director, Springtide Capital said: “It’s an ideal time to review the mortgage terms on a buy-to-let portfolio and secure a rate, where circumstances fit, that enables the landlord to maximise security whilst not compromising too much on the yield. As one of London’s leading buy-to-let specialists, we have the knowledge, expertise and lender relationships to help landlords through this regulatory change.”

The facts

The PRA’s supervisory statement outlines minimum expectations that firms should meet in underwriting buy-to-let mortgages, specifically:

 

  • Affordability assessments should take into account: borrower’s costs including tax liabilities verified personal income (where used by the lender) and possible future interest rate increases. When setting the expectations for future interest rate increases, the PRA reviewed the prevailing standards in the industry and considered the impact of changes in interest rates, and calibrated the stressed rate accordingly.
  • Lending to portfolio landlords (defined by the PRA as being those with four or more mortgaged buy-to-let properties) should be assessed using a specialist underwriting process.
  • The PRA wishes to clarify that the provision in Capital Requirements Regulation (CRR) which reduces the capital requirements on loans to small and medium-sized enterprises by around 25% should not be applied where the purpose of the borrowing is to support buy-to-let business.
  • An implementation timeline of 1 January 2017 for the more straightforward changes, and 30 September 2017 for the remainder.
  • Allowing firms to assume reasonable rental increases when assessing affordability in the context of possible future mortgage interest rate increases.
  • Excluding those re-mortgaging (and not increasing borrowing) from the supervisory statement, in a similar way to residential lending.
  • Reflecting the change to mortgage interest tax relief announced by HM Government in 2015, which has already led to several firms increasing their interest cover ratio affordability thresholds. The PRA has reaffirmed its expectation that firms should also take these new costs into account when assessing affordability.

A buy-to-let market update

According to the Council of Mortgage Lenders (CML), the buy-to-let market had a weak start in 2017, contributing to an overall fall in lending of this type in the last 12 months. Although competitive mortgage rates are available, the tax and prudential measures have placed considerable pressure on the market.

CML added: “From April 2017, landlords who are higher rate taxpayers will see a progressive reduction in the tax deduction they can claim from mortgage interest each year, the first stage of a four-year transition. We have not yet seen any sudden contraction in lending as a consequence, but it will make landlords more cautious and is likely to restrict their ability to re-leverage their portfolios. Signs of this have been evident for some months, with fewer landlords releasing equity when they refinance.

“Since January, the Prudential Regulation Authority (PRA) has required lenders to stress test new lending by either 5.5%, or 2% above the pay rate, whichever is higher. Lenders had already prepared for this, and in some cases applied the stress tests in advance of the deadline. This makes it more difficult to sustain a highly-leveraged buy-to-let business model, with negative repercussions in regional markets with low rental yields such as London.”

Buy-to-let mortgage applications are changing

 

The mortgage industry is set to see another regulatory change in the new year, with a recent announcement detailing new rules that mortgage lenders will be required to adhere to when considering a buy-to-let application.

In view of the announcement, we’ve provided a summary of the changes, the exceptions and an opportunity for landlords to call on Springtide Capital’s expertise to take advantage of the current regulations.

THE REGULATORY ANNOUNCEMENT

The Prudential Regulatory Authority (PRA) has recently announced regulatory changes to the way that lenders assess buy-to-Let mortgage applications. These changes will be implemented by lenders before January 2017 and may affect your ability to obtain a buy-to-let mortgage, the amount that you can borrow and the information you will need to supply.

THE CHANGES

All buy-to-let lenders require that the rental income of a property covers the mortgage payment plus a margin to cover other costs. Calculated as a percentage, this is called the Interest Coverage Rate (ICR) and is the main focus of these latest changes:

  • Going forward, lenders will require a minimum ICR of 125% and will base their ‘stress test’ calculations on an interest rate of at least 5.5%, regardless of how low the interest rate you have secured actually is.
  • Additional costs such as agency fees and council tax etc. will be included in the ICR calculations, as well as changes to income tax liability due to the reductions in interest relief between 2017 to 2020.
  • There is an exception on 5yr+ fixed rate products as these can be stress tested at 125% of pay rate and the ICR can also be topped up using a personal income affordability test.

In addition to changes to the way that the ICR is used, lenders may subject landlords with four or more properties to a ‘specialist and proportionate’ underwriting approach.

THE EXCEPTIONS

Some individual circumstances fall outside of the new regulations, including:

  1. Remortgages of buy-to-lets with no additional borrowing (apart from any added lender or admin fees).
  2. Those with an income in excess of £300k income and/or £3,000,000 in net assets.

THE EXPERT VIEW

Henry Knight, Managing Director, Springtide Capital, commented:“We have seen in the past that when these kind of regulations are recommended, the majority of lenders will exceed the minimum requirements to ensure they are not seen to be too close to the “minimum” allowed.  We have already seen a number of lenders move their ICR to 145% with a 5.5% interest rate stress test and we envisage that a number of those still at 125% are likely to increase further.” 

ACT NOW TO TAKE ADVANTAGE OF THE CURRENT REGULATIONS

It is difficult to know exactly where the lenders will end up, however there is a window of opportunity to act now to review your portfolio growth strategy and ensure you can benefit from a more relaxed stance before the new rules have to be implemented. Our experienced advisers are available to discuss the above changes in more detail with you and provide advice to suit your individual circumstances.

To speak to one of our Mortgage Consultants today, call us on 020 3040 4400 or email info@springtidecapital.com

Achieve buy-to-let wealth in five steps

 

 

“If you build it, he will come.” In reality, building your buy-to-let portfolio isn’t quite a Field of Dreams our experts give you their top tips on bringing your game up and wealth on.

 

#1 Get it right first time

As with any business, it’s important to set some targets and focus on what you’d like to achieve. This could be a healthy yield, capital appreciation or entering the stock market.

Our top advice is to start (relatively) small, keep it simple, start local, and work with an experienced mortgage adviser to begin your journey to an extremely profitable portfolio.

It’s tough to get started, but it will get easier and you’ll become more astute at researching and making investment decisions with your mortgage adviser.

Don’t purchase a house you like; purchase a property that will increase your wealth.

 

#2 Maximise profit from each property purchase

Boost profits and decrease risk – buy low and sell high.

Buying at auction is a popular way to do this, but be mindful of the pitfalls, carefully research the area and ensure the property doesn’t have any structural problems.

Negotiate heavily on new purchases; you’re in a strong position with no chain behind you.

 

#3 The team

Develop a team and incentivise a job well done – a great team can translate into great profits.

Your team needs to consist of ‘those-in-the-know’ kind of people:

  • An experienced mortgage adviser with existing successful buy-to-let client portfolios.
  • An accountant to handle tax, company status, and much more.
  • An agent to let the property (possibly with a maintenance agreement) who will carry out thorough checks on tenants and will ensure your properties are never vacant.
  • A team of builders, plasterers, plumbers, and electricians.

Henry Knight, Director, Springtide Capital commented: “Surrounding yourself with the right team of experts is the key to portfolio success from day one. There have been a number of tax changes, which makes the services of an accountant invaluable!

“I’ve personally found University cities to be profitable; they have a strong demand for rental properties, not only for students but also for employees. Transport links also attract high-net-worth commuters – investors would be wise to look out for HS2 hotspots in the future.”

 

#4 Don’t be tempted

It is dangerous to take out a loan and secure it against more than one property, because your lender could force you to sell those properties to redeem the debt. Secure a loan against no more than one property if possible.

Don’t jump into a purchase without researching it properly and obtaining advice from a mortgage adviser. Properties are not always easy to move on and a bad decision could stem your success.

Keep going when times are tough. Offering low will most likely mean offering on a number of properties before you get a ‘yes’.

Keep your tenants happy to ensure a steady income stream.

 

#5 Money makes money

Your mortgage adviser will provide advice on how to make the most of your money, as will your accountant. The key to success is to make your money work hard for you.

This could be continual investment in new properties (expansion), making efficiencies by selling off some properties which yield less profit, or investing your money in a completely different opportunity.

 

We’ve been helping landlords to build their portfolios for many years, and we’d like to help you to achieve your wealth goals too. Call one of our experienced mortgage advisers on 020 3040 4400.