7 March 2017
As life becomes tougher for landlords, it is vital to seek expert advice
THE BUY-TO-LET MARKET HAS CHANGED SIGNIFICANTLY OVER THE PAST 18 MONTHS, WITH A STAMP DUTY SURCHARGE INTRODUCED ON PURCHASES, INCREASED REGULATION, TOUGHER AFFORDABILITY CRITERIA FOR MORTGAGES AND THE PHASING OUT OF MORTGAGE INTEREST TAX RELIEF FROM NEXT MONTH.
Unless you are in the fortunate position of being a cash purchaser, you will need a buy-to-let mortgage. Even if you are moving but keeping your existing property to let out, the amount any lender is willing to lend will usually be based on the rental that property can generate. When assessing a buy-to-let application, lenders also look at a number of factors in addition to the rent to ensure you are the right ‘risk’, such as your age, income and credit history.
Getting a buy-to-let mortgage became harder from January, when the Prudential Regulation Authority introduced new ‘guidance’ as to how lenders should treat new buy-to-let business. For example, rental cover requirements increased from a typical 125 to 145 per cent – in effect meaning the rent charge must be higher than previously required or the lender will reduce borrowing. More favourable terms are available, perhaps offering 125 per cent to those who can demonstrate they are (and will continue to be) basic-rate taxpayers, with the rental income included. On top of this, the rate at which cases are ‘stressed’ has moved from a typical 5 to 5.5 per cent (or pay rate plus 2 per cent if higher). The impact of this means that a larger deposit is required although it is worth noting that more favourable stress rates can be assessed by fixing for at least five years.
Some lenders are being more innovative so that those looking to invest for the first time or expand their portfolio can do so. For example, there are some lenders who have dropped rental cover requirements altogether and assess the case on an ‘affordability’ basis. For affluent borrowers with few commitments, the results may be more favourable than the routes employed above. Others will allow any surplus income to be taken into account should the underwriting fall short of where regulations require.
Further restrictions may be placed on any potential borrowing depending on the type of property being purchased. For example, new-builds, studios, flats above a commercial property and high-rise could all be deemed riskier and therefore result in lower amounts being lent or refused altogether.
Unfortunately, regulation doesn’t stop there. From October, lenders will be required to employ a more robust assessment of borrowers who have more than four mortgaged properties, which will no doubt mean more paperwork required by the lender.
There is no denying that life has become tougher for landlords but property is likely to remain a popular investment as investors may have different motivations for choosing it over (or in addition to) other assets. But with the level of complexity increasing with more regulation and tax changes, it is vital that landlords access expert advice from both tax and mortgage specialists.