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Friday, April 21, 2017

Landlord Mortgages and BTL Finance Are Key

There are two things that make for a successful residential investor. Firstly, there is getting good tenants; bringing landlords a regular and recurring income to service their debt.

The other is access to debt at a reasonable cost - a mortgage at a low rate.

Landlord Mortgages - a potted history

There is a lot to BTL and landlord mortgage finance; it is more complex and involved than a standard mortgage. Landlords have lived through extraordinary times in terms of access to debt recently.  In the 90s we had the emergence of the whole buy-to-let industry, when lenders recognised that lending against property to bone-fide landlords using an AST was not such a bad thing.  The BTL boom meant that landlords could get their hands on ridiculous amount of cash with literally no capital,  making them and the lenders vulnerable to any down turn in capital values. 

Then, came the inevitable crash. 

The 'credit crunch' meant that debt became a dirty word overnight.  Cash was again 'King', and low rated landlord mortgages were only there for landlords with 30% + of cash to put down.

In recent years we have seen the relaxing of this tight lending criteria, and now, once again landlord mortgages are readily available with Loan To Values (LTV) as high as 85%. 

Back to the boom days?! Well almost.  Now we have the Prudential Regulation Authority (PRA) wading into the mix and scuppering the happy days of easy lending.

PRA - Landlord Mortgage Controls

The Prudential Regulatory Authority (PRA) are a new organisation set up as part of the Bank of England to maintain stability within the economy.  One of the parting shots of the last Chancellor George Osborne was to slap on a tightening of the financial screw on lending to the buy-to-let sector by giving more restrictive guidelines to banks  underwriting the landlord mortgages.  In essence what it means to me and you it means that landlords will be able to borrow less again reversing the easy credit environment of the last few years.  The way that this will effect landlords is that the PRA have added an affordability test that requires landlords to be able to afford repayments based on an assumed interest rate of 5.5% as a posed to that which they actually pay.  This has had the effect of increasing the amount of rental cover required by many lenders from what was an industry average of 125% of the rent to 145%.  Portfolio landlords (defined as 4 or more properties) will face much tighter tests on their income than previously.  This element of the changes is due to come in from 30th September.

The motto of the landlord mortgage story is that whilst lending will not be as tight as it was before the buy-to-let revolution or after the credit crunch; the days of easy access to landlord mortgages and BTL mortgage finance are probably over for now.

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