Has buy-to-let escaped the MMR clampdown unscathed?

The private rental sector has effectively been left untouched, despite a hefty overhaul elsewhere. The market will not go unaffected, however.

Although there is no direct impact on buy-to-let mortgages from the paper, reverberations will undoubtedly be felt as the impact on residential mortgages takes hold. The question is whether the result will ultimately be positive or negative for lenders and intermediaries.

Data from the Intermediary Mortgage Lenders Association published in January shows that 48 per cent expect buy-to-let business to increase.

This beats the projections for both first-time buyers and next-time buyers, for which 40 per cent of intermediaries expect more business. But will it be easier or more difficult to find the right buy-to-let mortgage for a client once the MMR is in place?

Residential crossover

While specialist buy-to-let lenders are set up purely to deal with the rental market, those offering residential too will be implementing the MMR for their residential operations.

“If you make more stringent residential regulation, you tend to see that spill over,” says Chris Norris, head of policy, public affairs and research at the National Landlords Association.

“The fact of the matter is most institutions that offer buy-to-let mortgages also offer residential mortgages. From the economies of scale, what you do on one side of that divide has an impact on what will happen on the other side.

“Unless you are a specialist lender, the characteristics of the loan you get for your buy-to-let will be similar to residential.”

Interest-only mortgages span both types of lending and with the MMR rapidly approaching, many providers have chosen to exit the market for personal mortgages rather than get involved in assessing whether a repayment strategy is appropriate.

In March 2013, HSBC and Yorkshire Building Society withdrew interest-only residential mortgages, although buy-to-let was not affected.

It seems that lenders remain prepared to maintain an interest-only offering for buy-to-let purchases for now, but this could change post-MMR.

“It may be that some lenders don’t want to be seen to be offering to one when they can’t to another,” says Peter Williams, IMLA executive director. But, he added, he does not believe this is a widely held view.

Mr Norris says uncertainty remains as to whether greater scrutiny of suitable repayment vehicles will extend to buy-to-let purchases – although not an MMR requirement, lenders may take their own view.

He points out that a business model of repaying the loan when the property is sold is far more realistic for a rental property than an individual’s own home. “The ramifications of not having something in place will not be so severe,” he says.

FTBs getting in on the act

Stricter residential lending criteria may lead first-time buyers to attempt to access more favourable buy-to-let lending terms and live in the property themselves, according to David Lawrenson, founder of LettingFocus.com.

“It could be that any more constraints in residential lending could lead people to apply for a buy-to-let mortgage, even though that would be a breach of conditions,” he says.“I think lenders will probably be on their guard for that.”

It is difficult to police, he says, with checking the type of buildings insurance one of the only ways to tell how the property is being used – something not all lenders do, he adds.

Mr Lawrenson suggests tighter constraints may be applied by lenders to negate this possibility, such as only offering buy-to-let mortgages to those who already own a home, increasing proof of income checks or requiring a higher deposit for first-time landlords.

Bernard Clarke, communications manager for the Council of Mortgage Lenders, dismisses the idea. “I don’t think that that is a particularly likely option,” he says.“We have not made any analysis of that.”

Positive outlook

While there may be uncertainty, market dynamics generally seem favourable for buy-to-let, which perhaps explains why lenders have been moving back into the buy-to-let market. Most suggest this trend is likely to continue post-MMR.

IMLA’s Mr Williams attributes this to increased demand in the rental sector, rather than a lack of regulation compared to residential.

“A lot of lenders have moved into the buy-to-let market because there has been unfulfilled demand and the pricing is more favourable and the margins are better,” he says.

“I don’t think people are rushing there because they think it is a market where it is the Wild West, where they can play and nobody can complain.”

Private renting is widely expected to increase, leaving the market open to meet that need. But uncertainty has been holding back development, according to Mr Norris, which has the potential to reignite once the MMR is in place.

“We desperately need to see not necessarily volume lending but innovative lending in the buy-to-let market,” he says.

“Landlords have really developed over the past decade; there is lots of segmentation and therefore specialisation. They’re not really able to access the level of finance to take that to the next level.”

At the moment, Mr Norris says, if a landlord is looking at anything other than a normal house in a normal part of England, raising finance is very difficult. Moving from being a landlord with a small portfolio to a larger one is also tough, he adds.

“Something that bridges that gap would be very popular with landlords,” he says.

European influence

Uncertainty around what will happen regarding European legislation continues to inhibit development, he says.

Work continues to improve consumer choice and outcomes across Europe but, Mr Williams says, buy-to-let is not recognised as a classification by some on the continent; the sector could therefore be caught up in legislation designed with residential in mind.

“I would love to tell you that things are crystal clear in Europe and we know what they’re going to do, but we don’t,” says John Heron, director of lending at specialist buy-to-let lender Paragon.

“There are some very different interests at work here. Some are keen to include buy-to-let mortgages in European regulation and some are not. The latest we have heard is there is likely to be some level of exemption for some level of buy-to-let lending, but it is one of those things we will believe when we see it.”

European changes aside, most are upbeat about buy-to-let prospects post-MMR. Rental demand is increasing, house prices are rising in key areas and landlords are optimistic about portfolio expansion.

What remains to be seen is, from the lender’s perspective, whether tighter residential regulation means simpler business if applied to buy-to-let as well.