A new year brings new things; whether that be new starts, new beginnings or even new mortgage products.
A recent paper by the Prudential Regulation Authority (PRA) has changed the game with buy to let mortgages forever. This paper has outlined how buy to let lending should be underwritten and provided minimum underwriting standards.
This is due to the ex-Chancellor of the Exchequer, George Osborne, making drastic tax changes to buy to let properties in his 2015 budget. These changes directly affect landlords and the profits they make on letting properties.
As such landlords will lose tax relief on the interest mortgage payments they make on their buy to let properties, over a period of 4 years. This, however, will be capped at 20% as of 2020/21.
In light of this, the PRA have introduced a 2-stage change in buy to let underwriting with the first stage having kick started on January 1st 2017.
The first stage is the change to interest cover ratios; this was previously around 125%, whereas it has now been raised to 140% for any buy to let lending which is not a remortgage on a pound for pound basis (capital raise). This alteration is combined with an increase in the stress rate for products which are less than 5 years to 5.5%. This first step has brought on the death of the lifetime tracker payrate products which used to occupy the market.
The second stage change which will start in the autumn of 2017 is based on how buy to let landlords with more than 4 properties will be underwritten. Instead of a lender looking solely at the subject property, they will now underwrite the client’s whole portfolio.
There are a few solutions which will help landlords through these changes, especially if they are looking to raise capital on any of their properties.
Solution one: Company structure, such as a Special Purchase Vehicle (SPV) or limited company, to own buy to let properties as these have not been affected by the above changes
Solution two: Take out a 5-year fixed, or longer, rate if the buy to let property is owned in personal names.
Product of the week: 5 years fixed rate at 3.29%, 70% loan to value
This product is a 5-year fixed payrate product with the calculation at 140% at 3.29% and a maximum loan of £1,000,000.
This product is only available for buy to let properties, and not for regulated consumer buy to let properties. This lender has a minimum income requirement of £20,000 pa of earned income, with the loan amount based on the rental calculation.
This is the cheapest 5-year fixed payrate product on the market available to buy to let landlords owning property in their personal names, and not in company structures.