Buy-to-let landlords have found a way around strict new rules that restrict how much they can borrow – by taking a lengthier loan.
The Bank of England’s Prudential Regulation Authority set out the stricter lending rules in September of last year and these were implemented by lenders in January. Lenders now require that landlords show a rental income of 145% of mortgage costs – an increase from 125% previously. In addition, prospective borrowers are required to pass a 5.5% mortgage rate stress test. However, for five-year fixed loans, lenders are able to reduce this rate.
According to mortgage broker Enness Private Clients, choosing a five year deal can allow a buy-to-let investor to secure an additional £144,000 of funding on a £550,000 property.
2016 saw a number of changes introduced that have hit buy-to-let landlords hard. Former Chancellor George Osborne announced cuts to mortgage interest relief due to be rolled out from April this year, together with a 3% stamp duty hike on ‘second homes’ from April 2016 which affected investment properties. Unsurprisingly the Council of Mortgage Lenders reported a decrease of 21% in buy-to-let lending in December last year, compared to the same month in 2015.
However, landlords have found a workaround for the more stringent lending criteria. Where the investor client is locked in for a 5 year deal, lenders can be more relaxed. The downside is that the borrower is locked in for longer than usual, which could be a concern in today’s buy-to-let climate.
As an example, Precise Mortgages will apply the 145% rental calculation (125% if the property will be bought through a Limited Company) and apply a 3.99% stress test on a five year fix – almost 2% less than the usual required rate. In fact, lending criteria on lengthier loans varies across lenders, making the marketplace rather complicated to negotiate. A landlord achieving £1,750 in rent monthly could borrow just £263,332 with Santander – compared to £420,000 with Paragon, on a five year deal.
More landlords are now buying properties with cash than before, thanks to the spate of changes. Countrywide reports in January of this year, the net number of landlord sales was positive for the first time since the 3% stamp duty hike was introduced. However, despite showing a recovery, they note that the figures are still much lower than January 2015 or January 2016.
Where landlords have a large deposit, there are some exceptional rates on offer. For those with a 40% deposit, Santander has a 1.44% fix for two years with an arrangement fee of £1,999. The Mortgage Works has a 1.94% two year fixed deal for those with a 25% deposit, or a 1.69% tracker for those with a 35% (arrangement fees for both are £1,995).
Affordability – what’s the deal?
The new strict affordability tests were designed to tighten up loose credit standards and ensure that if interest rates rose, the housing market would not be destabilised. Lenders are now obliged to assess whether landlords can afford the true costs of running a rental property which include tax liabilities and the impact of losing mortgage interest tax relief.
Some experts believe that the measures will create “mortgage prisoners” because current investment borrowers will not be able to pass the new stress tests and cannot therefore move away from their lender’s Standard Variable Rate, after their fixed deal has ended. However, it should be noticed that borrowers who remortgage will not be caught by the measures.
Of note, not every lender is using the 145% rental income rule. Some lenders, such as Precise Mortgages, are assessing on a case-by-case basis – while Barclays looks at the prospective borrower’s full financial circumstances including any personal income that they have.
New investors may wish to evaluate whether setting up a limited company could help their circumstances. This will be more tax efficient from 6 April when the mortgage interest relief is lost. The change won’t affect limited companies who can continue to write the cost of borrowing against profits. For this reason, lenders are not stress testing limited companies in the same way as individual borrowers: