Landlords are adjusting to the new buy-to-let (BTL) regime and understand the impact of recent changes according to a regular survey on the sector conducted by Mortgages For Business (MFB). It found that 67 per cent of respondents to the survey indicated a good understanding of how the new guidelines have affected borrowing potential.
The figure has risen from 60 per cent in November. Some 23 per cent showed partial understanding, 7 per cent were unclear on how they might be affected and 3 per cent remained unaware of the changes. Chart 1 shows the survey response.
Stress tests
From 1 January 2017, the Prudential Regulatory Authority (PRA) introduced stricter underwriting criteria for BTL mortgages – lenders must conduct interest rate stress tests and interest coverage ratio (ICR) tests. Loans will be stress-tested using a 5.5 per cent rate or the pay rate plus 2 per cent – whichever is higher – for the first five years of the loan unless it is fixed for five years or more.
The ICR test is designed to ensure the rental income is sufficient to cover the mortgage payment and takes account of all costs. Lenders are said to be offering an ICR of 125 per cent on limited company mortgage vehicles and 145 per cent on personal BTL mortgages.
Other PRA guidelines, such as the need for lenders to take greater account of borrowers’ personal income and ensure portfolio landlords meet specialist underwriting standards, will come into force by September, although some lenders are likely to have implemented the changes already. This comes on top of the measures introduced by George Osborne reducing the tax relief on mortgage interest for BTL investors and reducing the tax allowance that landlords can claim for wear and tear, as well the decision to charge an additional 3 per cent of stamp duty on BTL properties.
Reduction
It is no surprise then that in the wake of these changes BTL house purchases have seen a marked reduction.
The CML reports that the number of loans for BTL purchase has halved over the 12 months since Mr Osborne’s policies kicked in, while remortgage activity remains virtually unchanged. House purchase activity in the BTL sector now accounts for just under a third of all lending. Before the change it accounted for 40 per cent of BTL lending, while remortgaging, which had accounted for 50 per cent, now represents 66 per cent.
MFB’s survey found that the limited company structure for BTL purchase is growing in popularity, with 42 per cent of respondents owning at least one property via a limited company, up from 32 per cent in November.
MFB also noted a reduction in high loan-to-value (LTV) lending among respondents over the past five years. In February 2012, just over 25 per cent of respondents had borrowed more than 75 per cent of the value of their portfolios. In the latest survey only 10 per cent have that kind of borrowing. It predicts that this kind of LTV borrowing will reduce further due to rising property prices and tightened affordability testing.
More professional
The growing professionalism in the sector, at the expense of amateur and so-called accidental landlords, has been largely welcomed and embraced. MFB reports that most respondents acknowledged the importance of advice and 62 per cent had a professional tax adviser, or were prompted to seek one after the changes were first announced. But 38 per cent failed to seek professional advice.
The firm concludes that while the BTL sector is clearly set to shrink this year, its survey shows landlords “are a resilient bunch” able to adapt their investment strategies to the new stricter underwriting and regulatory regime. If these findings are anything to go by, the changes are positive and the sector will increasingly be about quality rather than quantity. It appears to be well on its way to becoming a leaner, fitter version of itself.
