New Buy-to-Let Mortgage Rules Could Change Property Investment for Good

Buy-to-Let Mortgage Rules

Buy to let investors could be forgiven for feeling rather disappointed recently.

Firstly, of course, George Osborne received widespread scorn from professional landlords for firstly scrapping tax relief on buy-to-let mortgages, and then subsequently hiking stamp duty on second homes.

Little wonder, then, that at the time 10% of landlords surveyed by the Residential Lettings Association planned to exit the market, while still more said they wouldn’t be expanding their portfolios any further.

In the last few weeks, however, the news seems to have even more uncomfortable. The Prudential Regulation Authority (PRA) has signalled that changes to buy-to-let mortgage affordability measures are likely to change, putting further pressure on BTL investors. The Bank of England has signalled that lenders have until January 1st 2017 to implement these changes, meaning that the clock is already ticking…

What Has Changed?

In the past, property investors have had to apply for specialist BTL mortgages if they plan to rent out their properties, often requiring considering higher deposits than for residential property.

Recent research, however, has suggested that this historic 125% rental stress test may not be enough if and when interest rates change. This is especially so with the uncharted territory of Brexit on the horizon.

The PRA has now proposed that a 145% rental income ratio is introduced, in order to allow landlords more “breathing room” should mortgage rates increase.

While there is some logic behind this thinking, there are concerns among property investors about the potential impacts of these changes.

The first question is what happens if the sums don’t add up? To this end there are a number of suggestions being discussed. Firstly, landlords may be expected to make a capital payment to their mortgage provider in order to bring their lending in line with the new proposals.

This could, of course, be an expensive endeavour.

Secondly, Internet chatter suggests that a number of residential landlords will be forced to increase rents in order to meet the lender requirements. This potentially puts further pressure on “Generation Rent” who, if figures are to be believed, are already struggling to find affordable rental accommodation in many parts of the country.

How to Prepare for the Changes

Property investors are already being encouraged by some sources to remortgage in the near future, avoiding those lenders who are already implementing the new standards to lock in more favourable rates for the foreseeable future.

It has even been suggested that paying an early repayment charge to get out of your commitment and remortgage now may prove to be a financially sound proposition for the future. At the time of writing a number of lenders such as Santander have yet to implement the latest proposed changes.

A second idea for preparing for these changes is to seek out a lender which permits “top slicing”. While you’ll still need to meet the 145% stress test rules, a limited number of providers will let you “top up” mortgage payments with other income (such as from a job) in order to meet the required thresholds.

Be aware, however, that taking your external income into account in this manner will require the disclosure of detailed information on existing credit commitments, living costs, essential expenditure and more. This is therefore not a move for the feign-hearted.

While such an activity will of course impact your monthly cashflow, it is seen by many as simply the price of entry for landlords in the current economic climate.

Lastly, one final option for relieving the pressure is to liquidate existing properties and instead re-establish yourself in an area where property prices are lower on average, while rental yields are more generous.

Such areas permit a lower-risk investment, with smaller costs of entry into the market and rental income which more closely matches the PRA’s new guidelines.

It’s no secret that the so-called “Northern Powerhouse” is responsible for many of these areas, with Liverpool particularly being singled out on a regular basis for low prices and strong yields.

Whatever you decide to do, with changes coming in the near future it pays for property investors to do their due diligence well in advance, speak to their financial expert for independent advice and start putting in place a plan to maximise revenues in the new BTL landscape.

About the Author