The finalised PRA regulations for buy-to-let mortgages were published at the end of September and there are concerns amongst some in the industry about how the prescribed changes to underwriting standards are going to affect the market and how much more complex arranging finance for landlords will become.
For shorter-term buy-to-let rates, the PRA has stipulated a minimum interest coverage ratio (ICR) of 125% and have a minimum stress test interest rate of 5.5%. Also, when assessing customer affordability, lenders are now expected to take account of the likely interest rate increases during the first five years of the mortgage contract. However, for fixed rate buy-to-let mortgages of five years or longer, these requirements do not apply and there are already some lenders, for example Newcastle Building Society, offering different rental calculations for five-year fixed rate products.
The PRA has set 1st January 2017 as the deadline for lenders to implement these new measures for ICR tests, so over the next couple of months we can expect a raft of changes to lenders’ rental calculations. One of the common concerns raised is that landlords in certain areas of the country where rental yields are lower, for example London and the South East, will find it difficult to meet the new stress tests.
It has also been suggested that as the overall yield for buy-to-let properties varies so greatly around the UK, we may see some lenders having geographical ICRs for different areas of the country, which will add another layer of complexity to the already challenging task of sourcing the most suitable buy-to-let mortgage for landlords.
The PRA underwriting standards policy has confirmed that “lenders can use personal income as a means for the borrower to supplement the rent within their affordability test”. This is likely to result
in a wide range of approaches by lenders when assessing customer affordability, which may affect the choice of products available to clients and further increase the complexity of lending criteria.
With reduced buy-to-let tax relief coming into effect in 2017, lender’s may also offer different rental calculations depending on the client’s tax status, with higher rate tax payers being subject to more stringent affordability tests.
Alongside the PRA’s expectation for ICRs and interest rate affordability stress tests, the underwriting policy also makes a special case for portfolio landlords, who are defined as having “four or more distinct mortgaged buy-to-let properties.” It is indicated that as lending to portfolio landlords is “inherently more complex”, lenders should take a specialist (presumably more lengthy and in-depth) underwriting approach to these borrowers.
It is possible therefore, that we will begin to see a distinct split between lenders in the buy-to-let mortgage market, with large specialist lenders dealing with portfolio landlords on one side and lenders who opt to deal only with smaller landlords with 3 or less properties on the other side.
Without doubt, the buy-to-let mortgage market will undergo significant change over the next 12 months and sourcing finance for landlords will become increasingly complex.
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