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?