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With significant changes to the buy-to-let mortgage market this year, Vidhur Mehra, Finance\u00a0Director at Benham and Reeves\u00a0Estate Agents looks at how this will affect landlords<\/a> and\u00a0property investors, both UK-based and overseas.<\/p>\n In 2014, the MMR (mortgage market review) became a headache for both property investors\u00a0and lenders in the UK. The regulation changes required qualified staff to conduct stringent\u00a0checks on mortgage affordability after the global financial crash (caused, in no small way, by\u00a0mortgages being agreed without affordability checks). Borrowers\u2019 finances came under scrutiny\u00a0like never before as every element of their outgoings contributed to the affordability tests. For\u00a0interest-only mortgage applications, a clear and guaranteed plan for repayment was the only\u00a0way to secure a loan.<\/p>\n Three years later and \u2018affordability\u2019 is still the watchword. The Financial Policy Committee (FPC)\u00a0has made a number of recommendations about the market and, specifically, it has directed the\u00a0Prudential Regulation Authority (PRA) to make sure\u00a0there are limits on buy-to-let mortgage lending in relation to loan-to-value (LTV) ratios and\u00a0interest coverage ratios (ICRs).<\/p>\n It is a somewhat strange policy decision, especially in light of the government consultation<\/a> that\u00a0concluded that buy-to-let landlords play a positive role in the UK housing market, investing in\u00a0housing stock and providing quality accommodation to those who, for many reasons, prefer to\u00a0rent rather than buy. It is estimated that by 2025, just 40% of people<\/a> living in London will own\u00a0their own home.<\/p>\n Strange too, as it already follows a series of government moves to regulate the buy-to-let\u00a0market, the latest being the cessation of higher-rate tax relief on mortgage interest for\u00a0buy-to-lets from April 2017. The government, it seems, is worried that buy-to-let lending poses a\u00a0risk to the financial stability of the UK – at a time when Brexit uncertainty is already causing\u00a0financial instability.<\/p>\n The Financial Times points out that the fall in the pound\u2019s value caused by Brexit is good news\u00a0for foreign property investors: \u201cForeign buyers may never get a better opportunity.\u201d Especially as\u00a0the housing markets seems unaffected and remains a good investment. In fact, according to\u00a0deVere Mortgages, there\u2019s been a sharp increase in the number of overseas buy-to-let investors\u00a0taking advantage of the pound\u2019s low value to buy UK property.<\/p>\n Peter Izard, Business Development Manager for Investec Private Banking<\/a> agrees:<\/p>\n \u201cInvesting in UK property has grown in popularity with international buyers in recent years; not\u00a0only because property, particularly in London, offers investors safe title and historical long-term\u00a0asset growth, but also the current added benefit of favourable exchange rates mean\u00a0international buyers receive more for their money. For example, moving \u00a31m to the UK for a\u00a0property investment on the 23rd March 2017 would cost US$250,000 less than on the 22nd June\u00a02016, and US$450,000 less than 1st July 2014. That\u2019s a significant difference and one which\u00a0means that keeping an eye on foreign exchange rates is every bit as important as keeping an\u00a0eye on property prices.\u201d<\/p>\n In addition, this year\u2019s Budget saw two housing investment initiatives, funded by the NPIF, to try and maximise house building to keep pace with demand. In the UK, housing demand continues\u00a0to outstrip supply.<\/p>\n Lenders assess a buy-to-let mortgage application based on the rental income and property value they are lending against. As expats and foreign investors have long been deemed higher\u00a0risk, regardless of assets and income, UK lenders have always been cautious.<\/p>\n New rules however, have upped the ante. Lenders are now seeking borrowers to guarantee 145% of their mortgage costs from the rental income rather than 125% previously. Lenders are\u00a0being required to assess borrowers\u2019 ability to repay at a 5.5% rate when determining mortgage suitability (which suggests a Bank of England rate rise might be on the cards). In addition, from\u00a0September this year, if an investor has a portfolio of four or more mortgaged properties, lenders will have to\u00a0review and assess the rental income and mortgage terms on each individual property before proceeding to lend against a further addition to the portfolio.<\/p>\n Some buy-to-let lenders already restrict the number of buy-to-let mortgages you can hold with them to four or total borrowing to \u00a32m. But that hasn\u2019t stopped landlords mixing and matching\u00a0lemortnders to get the best deal. The PRA rules state that\u00a0if a landlord has four or more mortgages properties that lenders now look at a landlord\u2019s full portfolio, not just the loans they have with them, before offering a mortgage to avoid \u2018riskier\u2019 loans.<\/p>\n As Hiten Ganatra, Director at Visionary Finance<\/a>, points out, this doesn\u2019t pose any real issue for\u00a0specialist lenders:<\/p>\n \u201cThe mortgage market for foreign buyers looking to purchase UK property for own occupation or\u00a0investment is very strong. A range of lenders, with rates starting from as little as 2.99%, can\u00a0lend up to 75% of the purchase price.\u00a0\u201cFor both buyer types, owner occupiers and buy-to-let investors, lenders assess the profile of\u00a0applicants to establish that they are of good financial standing, have strong\u00a0employment\/self-employed credentials and most importantly are able to service the debt. For\u00a0investment properties, whilst you will be achieving rental income which will be used to cover the\u00a0mortgage payments, lenders will still assess your personal earned income to ensure the debt\u00a0can be covered.\u00a0\u201cSome of the lenders allow for you to borrow the loan on an interest-only basis which means\u00a0you will only be paying the mortgage interest cost on a monthly basis. This helps you to keep\u00a0you monthly mortgage payments low and affordable.\u201d<\/p>\n While the threat of extra paperwork may put off high-street lenders, there are those who have the flexibility to cater for portfolio landlords, both UK and overseas, and they are ready with the\u00a0expertise to comply with the new regulations.<\/p>\n James Clarry, Head of Lending & Capital Management at Coutts<\/a> comments:<\/p>\n \u201cThe housing market continues to face headwinds, with taxation changes and political uncertainty weighing on asset values. However, there are also opportunities. Firstly, sterling\u00a0depreciation is attracting international investors who continue to see London as an attractive\u00a0global centre. Secondly, in an environment of slowing growth and lingering Brexit uncertainties,\u00a0the low-rate environment should continue to provide attractive conditions for borrowers. In response to the market challenges, many lenders have refocused their proposition to a core\u00a0audience. However, in our experience, these are the conditions where a flexible lending\u00a0offering is perfectly placed to support non-dom, international and UK clients with a tailored\u00a0range of solutions through onshore and offshore experts.\u201d<\/p>\n The \u201crange of solutions\u201d Clarry mentions is significant. New rules from April 2017 mean that the tax relief on mortgage interest for buy-to-let loans will decrease to 20% by 2020. The Mortgages for Business survey<\/a> found that this, alongside the stricter affordability requirements, would affect 60% of buy-to-let landlords. However, property held in a corporate structure, or limited company, is not affected by the tax relief changes, and the same report found that only a third of landlords had taken this route.<\/p>\n Ray Boulger, Senior Technical Manager at John Charcol<\/a> comments that in addition to tax-efficient wrappers for portfolios there are other strategies:<\/p>\n \u201cRecent regulatory changes imposed on buy-to-let lending by the Bank of England focus on stricter affordability assessments. The minimum interest used for the rental cover assessment\u00a0must be 5.5%, unless the interest rate is fixed for at least 5 years. Lenders must take account of\u00a0increased income tax liability where the investor is pushed into a higher rate by the income tax\u00a0increases.<\/p>\n \u201cMitigating strategies include putting new buy-to-let investments into a limited company. This not\u00a0only avoids the higher income tax charge but often allows a higher maximum loan. For example,\u00a0rental cover required for limited companies is often still at 125%, whereas for personal\u00a0investments lenders have generally increased it to 145%.\u00a0\u201cIncreasingly, lenders are using the flexibility allowed for affordability assessments on 5 to\u00a010-year fixes, in some cases even at pay rate. Therefore, choosing a 5 to 10-year fixed rate not\u00a0only provides longer term interest-rate protection but also often allows a higher LTV as well.\u201d<\/p>\n In addition, many financial institutions have already taken into account the new rules and are offering buy-to-let investors improved deals. New Street Mortgages, for example, has launched\u00a0a new range of low-rate products for professional and portfolio landlords that are up to 80%\u00a0LTV. The range includes loans to limited companies and the applications will no longer require\u00a0the principal applicant to be an existing buy-to-let investor.<\/p>\n In much the same way that property purchases rose dramatically just before the Stamp Duty\u00a0changes for a second home kicked in, January saw a nine-year lending high<\/a> before these\u00a0changes to the mortgage market. T he Council of Mortgage Lenders too predicts \u00a3248bn of\u00a0lending this year \u2013 up, albeit marginally, from last year\u2019s estimated total of \u00a3246bn.<\/p>\n It is clear then that buy-to-let lending is still big business. Even though it is predicted to slow (the Council of Mortgage Lenders expects the number of buy-to-let properties purchased to fall from 100,000 last year to 85,000 this year and 80,000 next year), the remortgage market however, is expected to thrive, especially if interest rates look set to rise, as savvy landlords will be looking at refinance options to maximise their investments.<\/p>\nLow-pound opportunities<\/h2>\n
New LTV ratios, interest coverage and lending dilemmas<\/h2>\n
Lenders \u2013 your flexible friend<\/h2>\n
Un-limited options<\/h2>\n
So what\u2019s next?<\/h2>\n