Since the PRA revealed its scope and timelines for new buy-to-let underwriting standards in September, there has been speculation that investors will look towards exempt mixed-use schemes or consider houses in multiple occupation (HMO) as a way of securing higher yields and increasing the loan-to-value ratio available from lenders.
Earlier this month Liz Syms, chief executive of Connect for Intermediaries, advised mortgage advisers not already in the HMO market to familiarise themselves with the necessary rules and regulations. Shawbrook Bank also predicted that appetite for HMOs will increase.
However, Adrian Dadds, managing director of St Georges Finance, said even if investors were prepared to move into HMOs, many high street buy-to-let lenders don’t offer HMO products or have higher stress tests for them anyway. “It is hard to mitigate this way because if you go down an HMO route you have much higher running costs as well as higher income,” he said.
Dadds is focusing on lenders that will offer lower levels of debt service coverage to clients in strong financial positions. “At the moment we are able to do this for clients with strong credit quality.”
He added that he is seeing more enquiries from people considering properties outside London and the South East, where they potentially can secure higher yields. “But they are then going to have to manage an asset five hours’ drive away, which probably has higher risks so I’m not sure that’s the answer,” he said.
Investors could turn to five-year fixed rates, which are excluded from the PRA’s stressed interest rate requirement. Dadds said this isn’t something he is seeing appetite for because of the anticipation of rates remaining low. However, he said he felt they represented good value for the certainty.
Adele Turton, managing director of Plan A Mortgage Brokers, said five-year fixes are something she is talking to buy-to-let landlords about but has concerns about their use. “If they fix for so long they may become mortgage prisoners at the end of it.
“I’m looking at shorter terms because things may change again. No one has a crystal ball but as a broker you have a responsibility to make clients aware of what could potentially happen,” she said. “A lot of clients have several hundred properties. Even if you have 10 it could be catastrophic if you get trapped.”
Dadds added that some are waiting for the Chancellor’s Autumn Statement to see if there is a reaction to lower levels of buy to let. “Is the government happy with that impact or will it look to change things?”