I would say that the last two years have seen the biggest changes to the buy-to-let market that I have witnessed.
I won’t go into these changes in detail here. However, it must be stressed that they have made the need for advice for landlords more imperative than ever, both from a mortgage and a taxation perspective.
Several major changes in regulation over the last two years have had major implications for landlords:
- April 2016: A 3% second home and buy-to-let (BTL) property stamp duty surcharge was introduced
- April 2016: 10% “wear & tear allowance” removed; only actual, quantifiable permitted costs can be offset for tax purposes
- January 2017: New rules governing Interest Coverage Ratios (ICR) and rental affordability assessments introduced
- April 2017: Income tax changes for rental income introduced (to be phased in over a four-year period, fully implemented by April 2021)
- April 2017: The Financial Policy Committee gained new powers to directly control ICR and BTL mortgage loan-to-value (LTV) restrictions, if needed
- September 2017: Rules introduced for ‘portfolio’ landlords
A recent survey showed that 34% of landlords were concerned over the ability to secure new deals when they remortgage following these changes. Profitability will come under great pressure this year and next as the income tax changes come through.
In reality however, as long as a landlord is working with a good mortgage broker to navigate the maze of options available, there are in fact a lot of positives and reasons to be cheerful.
BTL opportunities
Thanks to increased competition among lenders, the number of BTL mortgage products in the market has increased by 50% in the last two years. New lenders are coming to the market on an almost monthly basis as there is still a real appetite to lend to landlords.
Indeed, a recent survey by Sainsbury’s Bank showed that one in 10 UK adults are interested in taking out a buy-to-let mortgage in 2018. Nearly a third of those considering becoming landlords said they were ‘encouraged’ by current opportunities in the buy-to-let market.
A report from Shawbrook Bank last week noted that the impact has been felt more by the ‘amateur landlord’ community than among professional investors. It is these amateur landlords that we’ll focus on in this article, with a future article looking in more detail at the professional investor space.
Using personal income
One of the key areas the regulation changes have hit our landlord clients is in the rental income assessment requirements.
The ICR change listed above has seen the majority of lenders enforce a rental income assessment with 145% coverage required, i.e. the rental income must cover 145% of the mortgage payment.
In addition, the mortgage is stress tested at 5.5%. This means that lenders will work out whether you can afford to pay the mortgage if the interest rate went up to 5.5% during the first five years of the loan.
These two regulatory requirements in turn have increased the initial deposit required by landlords.
This can cause the maximum loan offered to be a lot lower than required, particularly on lower-yielding properties in London and the South East. To give a recent example:
- Property valued at £350,000
- Rental income £1,250pcm
- Rental income required with a 25% deposit based on 145% and 5.5% = £1,745
- Maximum loan offered on this property = £188,087 (54% LTV)
As such, whereas landlords would historically have expected to put down a 25% deposit (£87,500), these regulations increase that requirement to a 46% deposit (£161,913). That is an extra £74,413 needed to put down on a £350,000 purchase!
The good news is that a good broker will have access to lenders who can look to use a client’s personal income to cover this shortfall.
This is known as ‘top slicing’. In our case study below we highlight a recent example where, for this scenario, the client was still able to have a close to 75% loan-to-value mortgage, and with a very competitive rate.
Transitional remortgages
Another area where a good intermediary can assist their landlord clients is on a remortgage basis.
As long as the landlord does not want to release any extra equity from the property as part of the remortgage then several lenders offer specific products with a more lenient rental income assessment. These are commonly referred to as transitional remortgages. This opens up a lot more options for remortgage clients, and often on very competitive rates.
Longer term fixed rates
Some lenders will offer a more lenient stress test assessment on longer term fixed rates, typically those fixed in for five years or more. This means that if a landlord applies for a mortgage that is fixed in for five+ years, with some lenders they can get an increased loan amount (and so put down less deposit if a purchase).
Most landlords are looking at their buy-to-let properties as a longer term investment, so they like this idea of the increased stability in the monthly payments. This has proved an attractive option for a lot of our clients, with the added benefit of the increased borrowing amounts.
Case study
Let’s take a look at a case study. These recent Alexander Hall clients illustrate perfectly how using personal income can help buy-to-let landlords (names have been changed).
The client:
A young professional, Stephen, is a solicitor who purchased a new main residence two years ago and kept his previous property as a buy-to-let.
The scenario:
Stephen wanted to take some equity out of his investment property to fund some home improvement work, as well as to secure a new longer term fixed rate.
He spoke to the existing lender who could offer a new fixed rate, but would not be able to release any equity. He then spoke to two high street banks, but they both advised that due to their rental income requirements they could not even offer the existing loan amount, let alone any additional borrowing.
So, despite the monthly payments being very comfortable and covered by the rental income, and despite Stephen’s strong personal income, most lenders could not offer him what he was looking for.
The solution:
We spoke to a lender that agreed to use Stephen’s personal income combined with the property’s rental income when making their assessment on the loan amount. This meant that he could release the equity required.
The rate offered by this lender was also lower than those being offered by the two banks Stephen had initially spoken to and his existing lender.
A mortgage offer was secured in two weeks and the client is now in the process of getting the home improvement work carried out.
Property value: £530,000
Loan amount: £390,000 (previous loan amount was £330,000, so releasing £60,000)
LTV: 73%
Rate: 2.74% 5 year fixed
APRC: 4.6%
Term: 25 years interest only
Lender arrangement fee: £1,950 added to loan amount
Mortgage payment: £885pcm
Rental income received: £1,600pcm
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT
