New Buy to Let Loan Restrictions and Rules

New Buy to Let Loan Restrictions

What’s happening this week for nasty buy to let landlords? Landlords to be publicly shamed in market squares? Well, no, not yet!

This weeks’ thing is all to do with mortgages. And it has been kicked around for a long time now, but it is finally here.

On 29th September 2016, the Prudential Regulation authority published a paper which requires lenders to implement policies that will effect every landlord and investor who either has already got or who needs to get a buy to let mortgage loan in his personal name.

This change came about because the PRA was worried about buy to let lending.

I have always said that there has never been any evidence that landlords would suddenly find things hard and sell up en-masse, thus disturbing the housing market. In fact the arrears rate on buy to let loans is no worse than on residential loan rates. I have said that the PRA’s concern simply reflected the government’s desire to hurt “Mom and Pop” landlords in order to allow their big city institutional investor friends, like Legal & General, a free-er hand in the market we built up. I still think this is the case.

However, I guess the Conservative government’s relentless fiscal attacks which single out landlords, (the special “turnover tax”, the special 3% extra SDLT rate, the special capital gain tax rates), along with the ever-greater regulatory demands, will now have put many of the more highly geared landlords underwater. So, perhaps, as a result of this, caution and more restrictions on buy to let loans is now justified from lenders.

So what are the changes?

Prudential Regulation Authority Buy to Let Loan Changes

First, affordability. Lenders used to use a 125% rent to interest calculation. This has now risen to 145% for all personal loan applications.

Second, an interest cover ratio of 5.5% will be used or an affordability test on personal income, in which lenders will consider your personal income and whether it supports the applied for mortgage payment.

Third, if you have four or more mortgaged buy to let properties, then lenders will use a separate underwriting policy known as “portfolio underwriting”.

Fourth, re-mortgages are to be excluded from the changes but only for those applicants who don’t need further funds.

Fifth, five year fixed rate deals are outside the affordability changes (which is one bit of good news, I guess). Expect to see more of these products around and more demand for them.

The changes will come in in two stages: Rental Calculations by 1 Jan 2017 and Portfolio Underwriting by 30 September 2017. Lenders are expected to use their own judgement, so there will be lots of different ways of interpreting the new approach.

Some lenders have already changed the way they do things – we have already seen many switch to 145% rent to interest and portfolio underwriting.

You can expect to be asked for more information with greater interrogation of your figures with requests for bank statements, tax calculations, accounts and personal income/ expenditure, your inside leg/ bust measurement (I’m joking) to become routine.

We advise people to keep good records of all their costs, rents and void periods for each property. This will only help you in your applications for buy to let financing in the future.

Buy to Let Mortgage Loans in the Future

How will this effect mortgages in the future and the world of buy to let in general?

Well, certainly Loan to values will fall. We have worked out that for a property with a 5% gross (before costs) yield and valued at £300,000, at a 125% rent to interest, you would have got a loan of £218,000 (or 73% loan to value) in the old days.

At 145% rent to interest, on the same property, you will only get £188,000 (or 63% loan to value). So, now you’ll have to find another 10% of the property value, (or £30,000), from other sources. Ouch!

We think some lenders will certainly pull out of the portfolio mortgage area as they just won’t have the staff or systems to cope. I expect that we will see the back of the big high street banks and building societies in that particular area of business (if not in all buy to let, in some cases). This will leave the field open to the likes of Paragon, Aldermore et al to clean up even more. But with less competition, we expect these lenders to only fatten their margins and increase their rates. (I guess as a hedge you could console yourself by buying shares in these banks (both of which are on the stock market)!)

Different rental cover ratios may be applied for higher rate taxpaying landlords. Lloyds Banking group owned BM, (usually a pretty clueless lender), has already done this.

Lenders are increasingly acting now, even though the full effect of the “turnover tax” will not be felt until 202/21.

What Can Landlords Do Now?

So what can you do?

First, keep an eye on your portfolio and review it, especially low yielding properties. And act as soon as possible before the changes come fully in.

Second, look at the “go to” rate when any fixed rate loan deal you may have expires – and try to avoid the dreaded standard variable rate. No one should stay on a high variable rate – only fools are on lousy SVRs. Look to re-mortgage to a better deal if you can.

Third, bear in mind that not all lenders allow you to move product, so you may have to move lender, (if you can), which is more costly usually, as there will normally be a fee and some legal costs to pay.

Fourth, to maximise a mortgage you may opt to go for a fixed five year deal, but is that in accord with your plans? Exit fees may be high if you want to come out early. Bear this in mind.

Fifth, if your lender has no decent rates now (or has exited the market altogether, e.g. Mortgage Express), you may become a mortgage prisoner if you find you cannot switch to a better deal, either because your loan to value or rent to interest ratio falls outside any other lenders policy under the new criteria coming in.

Sixth, limited company mortgages are unaffected (so far!), but if you switch to a limited company structure there will be tax implications, so this may not make sense for all people. Speak to a good accountant who understands landlord issues.

Seventh, the harsher regime will make it harder for new entrant landlords to enter the market and for existing players to build portfolios. So we expect the total stock of private rented property to shrink over the coming years.

One positive outcome of that will be that the shortage of private rental properties will force rents will rise – we think they will start to motor well ahead of inflation in the next few years.

All we will need then is Jeremy Corbyn and rent controls. That will really put the tin hat on things and take us back to the days of 1960s bully boy landlords, such as Peter Rachman.

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We advise a range of organisations including banks, building societies, local authorities, social housing providers, institutional investors and insurers. We help them develop and improve their services and products for private landlords. David Lawrenson, founder of LettingFocus, also writes for property portals, speaks at property events and is regularly quoted by the media.

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