The buy to let market has certainly had a lot thrown its way in 2016, from the changes to Stamp Duty Land Tax to the impact of Brexit on the wider property market and regulatory changes are expected to introduce tougher underwriting standards.
After much anticipation, the Prudential Regulation Authority (PRA) has now finalised and published the new standards proposed in March 2016, revealing new underwriting rules for buy to let lenders. As proposed in the original consultation, lenders should now assume a minimum interest rate of 5.5% for the first five years of a loan and require borrowers to receive a minimum of 125% of mortgage costs in rental income. In practice, this could see lenders requiring up to 145% income cover.
Although lenders are still able to factor in rate rises of up to 2% when deciding a landlord’s affordability, this is a standard that many lenders already follow as part of a tougher regime adopted ahead of further tax changes in April 2017.
There are a few exceptions to the rule, such as holiday lets, bridging loans and property investment lending, which will all be exempt from new underwriting standards (but monitored carefully to ensure standards are maintained).
There would also be exceptions if the interest rate is fixed for more than five years, or if the overall mortgage term is less than that.
What do new underwriting rules mean for buy to let?
This is likely to cause a spike in borrowers opting for five year fixes, especially while rates are lower than ever since the market saw an influx of reduced rates. However, a lot of landlords may decide to opt for two or three year fixes and wait to see the outcome of taxation changes on business; five year fixes taken out now will not end until 2021 when tax relief changes will be fully implemented.
Essentially, new rules will largely remove the ability for higher and additional tax-paying landlords to deduct mortgage interest from their rental income before calculating their tax bill. This means that portfolio landlords (who have four properties or more) may experience ongoing losses, while amateur landlords could be deterred from entering the market altogether.
Tax changes may lead to higher minimum thresholds and rates being pushed up in the long-term due to the additional admin costs of these changes, however the PRA have advised now is an appropriate time to do so, as the majority of lenders reflect these standards in their existing practises anyway.
A deadline set by the Bank of England states that changes to interest ratio covers should be introduced by January 2017 and implemented by September 2017 at the latest.
Opportunities in the evolving market
With so much focus now being applied to underwriting standards, it could be that lenders actually take a more holistic approach to the actual circumstances and intentions of an individual customer.
This is something that has always been central to what we do here at Enness and our advisers are committed to exploring every solution available to help our clients achieve their financial objectives. A huge percentage of our clients are in the buy to let sector and we have a wealth of knowledge on how to navigate this space as a result.
Matthew Graves, Sales Director at Enness Private Clients, explained: ‘this may be a further blow to what seems like a shower of bad news for the buy to let sector, but that doesn’t mean opportunities cannot still be found. At Enness, we’ve seen no drop in enquiries for buy to let business and have found that lenders are in fact exerting themselves more to still offer some very beneficial deals.’
If you’re an existing landlord or new investor to the buy to let market, now is the time to seek expert advice on how to act in this ever-changing sector. We will help you decipher the opportunities available on the market, outline how these changes will affect you and find a bespoke solution to your specific financial needs, always ensuring the most beneficial rates and cost-effective structure.