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 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.”