Nothing ever stays the same – we all know this. In property, it would be nice if things stayed the same for six months.
However, sometimes changes happen in the background that we, as members of the public, may not be aware of. This certainly applies to the buy-to-let mortgage market and existing borrowers.
Former chancellor George Osborne, obviously not aware of his impending employment move, announced a raft of changes to how income from buy-to-let would be assessed in future years.
If we think back to pre-recession years, many buy-to-let mortgage deals were available up to 85 per cent loan-to-value and with rental coverage calculations for lending being completed based on 100 per cent coverage of the client’s mortgage interest rate. Many had no minimum income requirement for the applicant.
This led to a buy-to-let housing boomwhich pushed property prices higher and therefore out of reach for many potential homeowners.
Let us look at that previous lending scenario – a borrower wanting to borrow £100,000 against a property, paying an interest rate of 4 per cent, would have interest-only mortgage payments of £333.33 per month. The lender would have been happy to proceed as long as the gross monthly rental income (as assessed by a valuer or on the tenancy agreement) was in excess of £334 per month.
Now, that seems an age ago.
Post recession the changes began – 125 per cent rental coverage, then at an increased rental coverage interest rate of 5 per cent or higher. Minimum income requirements came in, with maximum loan-to-value ratios of 75 per cent in most cases. This, to a certain extent, did not have a massive impact, as many existing landlords were happy to continue on low variable rates instead of needing to refinance their debt.
But, that initial change did begin to eat away at the landlord’s options.
If we go back to our earlier example, a borrower wanting to borrow £100,000 against a property, paying an interest rate of 4 per cent would have interest-only mortgage payments of £333.33 per month. The lender, assuming a rental coverage of 125 per cent of the mortgage balance on a 5 per cent rental assessment, would need the gross monthly rental income (as assessed by the valuer, now most used by lenders) to be £520 or more.
With those minor amendments between 2007 and 2015, the landlord would need to have an extra £186 in monthly gross rent just to borrow the same £100,000.
Within the industry, we move with the changes and adapt. However, how many existing landlords are fully aware of the impact of Mr Osborne’s amendments? Many may not have enquired about further finance on existing properties due to low interest rates, or new ones because of the higher stamp duty charges.
We are going to see more landlords question whether investment in property is going to reach the aims they set.
Problems caused in the process of trying to improve our housing market will come later – of that I have no doubt. The question is, where will it end?
The Bank of England’s Prudential Regulation Authority (PRA), which monitors the soundness of banks and lenders, wants to put in place underwriting standards it feels will protect landlords from getting into financial difficulties if they suffer a shock to their personal income, or if interest rates climb rapidly. In some cases, even a property falling empty due to the loss of a tenant could hurt a landlord and their finances.
Lenders now want to ensure that the overall finances of a landlord borrower – not just the expected rental income levels – are sound, and that they would be able to maintain a financial agreement even if the rental income was lost.
When borrowers feel under greater threat – either from interest rates, or more likely, tax charges – they may look to refinance. Lenders are in some cases ahead of the game, raising the rental coverage required from 125 per cent to 145 per cent as they look to take into account the impending tax changes.
What will this mean? Potentially, lower borrowing available against existing properties – and if a borrower already has a small amount of equity they may not be able to re-mortgage the property, or they may need higher gross monthly rent to cover the difference.
If we go back to our earlier example, a borrower wanting to borrow £100,000 against a property, paying an interest rate of 4 per cent, would have interest-only mortgage payments of £333.33 per month. The lender, assuming a rental coverage of 145 per cent of the mortgage balance on a 5.25 per cent rental assessment (as now commonly used by lenders), would need the gross monthly rental income (as assessed by the valuer, now most used by lenders) to be £634 or more.
So, with those minor amendments, the landlord would need to have an extra £301 in monthly gross rent between the rental income they needed in 2007, just to borrow the same £100,000 in 2016.
This leads me to believe we will see some landlords selling off property from their portfolios (therefore increasing supply, one of Mr Osborne’s aims, which in turn could bring in capital gains tax and stamp duty revenue) or the tenants paying even higher rents. When you consider the bigger picture of Mr Osborne’s aim of opening up the market for first-time buyers, that is not going to help anyone. In that scenario, it is not necessarily the best scheme to sort the nation’s housing woes.
Tenants who want to buy need to be able to save for a deposit – landlords having to increase rents to finance their properties is not going to help that.
It is another government decision that ticks a few less boxes than it needs to. Perhaps the government should concentrate on building council houses and replacing the ones it is still selling off at large discounted prices before they put pressure on the area of the market that is helping people live where they choose.
There is no easy solution to the UK’s housing issues, but you cannot solve them in isolation by picking one problem within the bigger picture and placing so many restrictions that it ends up making the problems worse.
Stuart Gregory is managing director of Lentune Mortgage Consultancy
Key points
George Osborne announced a raft of changes to how the income from buy-to-let would be assessed in future years.
Post recession the changes began – 125 per cent rental coverage, then at an increased rental coverage interest rate of 5 per cent or higher.
We will see some landlords selling off property from their portfolios.
