In the run up to the 1 January’s 2017 introduction of stricter affordability criteria, under the direction of the Prudential Regulation Authority, many lenders pulled in their horns before launching products in the new year.
According to Moneyfacts, this led to the largest monthly drop in the number of available buy-to-let products in almost nine years. On 1 December 2016, there were 1,482 buy-to-let products available, but by 1 January 2017 that had fallen to 1,408 – a drop of 5%.
Explaining the drop, Charlotte Nelson, finance expert at Moneyfacts said: “With tougher affordability rules having come into play on 1 January, it is no wonder the buy-to-let market has taken a hit.”
She added: “Alongside this, major changes to the way in which income from property rentals is taxed will be coming in April, so lenders are perhaps withdrawing products to get back to their ‘core’ range, as they wait and see what other providers will be doing in the run up to April.”
Let’s wait and see
However, intermediaries in the market have countered this explanation. “Is everyone just going to sit on their hands until someone makes a move?” asked Simon Collins, product technical manager at Charcol.
Answering his own question he said: “I’m not sure that’s the case. If you look at what Precise has done, their offering is pretty ballsy. They’ve priced the five-year fixes at pay rate. They’ve got a product with a 4% cashback designed to help with the additional Stamp Duty surcharge. A lot of its rates are fairly racy – as are its lending criteria and it seems to be geared up for it.”
He added: “I think we have certainly seen lenders drawing battle lines into those who are going to help portfolio landlords and those who aren’t. I wonder if the lenders who are going to sit back and see are those who are not what I would call specialist lenders. I wonder if they are more the occasional buy-to-let lenders.”
This is a point of view echoed by Doug Hall, director at 3mc. He believes that specialist lenders have adapted to the new environment quickly and that many are making the most of the new rules around stress testing and affordability.
He explains: “Lenders like The Mortgage Works, for example, they have a different minimum rental requirement for existing customers and new customers. You’re seeing on a pound for pound remortgage Axis Bank applying the rules that are available to them. There are lenders out there that are not applying those rules and they may be just taking a wait and see approach at this stage.”
Hall continued: “The majority of mainstream lenders have not applied the rules in terms of providing the ability to do a five-year fix or longer, at pay rate. But you have got the likes of Precise Mortgages, Axis Bank, Kent Reliance, and Pepper Homeloans who are applying the rental stress at the pay rate, as opposed to a notional rate that may be slightly lower than 5.5%. But it is still not pay rate.”
Mainstream lenders including Santander, HSBC and NatWest are all using the calculation of 145% at 5.5% and are not making any exceptions for borrowers who are remortgaging to them but not capital raising.
A spokesperson for Santander said: “We are reviewing the market after the implementation of the PRA paper and will be looking at our pound for pound stance.”
Gaining ground in 2017’s flat market
According to figures from the Council of Mortgage Lenders, buy-to-let loans totalling £31.7bn were made in the first three quarters of 2016 and the market is on course to hit £40bn for the year. Forecasts suggest it will be flat or fall in 2017, but Hall is confident specialist lenders will grow their individual books of business.
He said: “What is being predicted for 2017 is either a flat market or slightly less and realistically I think it will be slightly less. What you will see, though, is the specialist lenders who have been pragmatic around the new PRA underwriting rules, will pick up more market share of a flat market.”
Looking ahead to the changes around portfolio landlords due in the autumn, he added: “If you look at the specialist lenders, a lot of them are assessing cases on an individual basis and it is not purely systems driven. I think you will see more challenges for the mainstream lenders when the new rules come in for portfolio landlords.”
Jane Simpson, managing director at The Business Mortgage Company, also said the coming year offered significant opportunities for specialist buy-to-let lenders.
She said: “I think there will be quite a split between the lenders. The specialist lenders will have multiple rental calculations with the heavier underwriting standards and they will be for the bigger landlords. Then there will be the high street lenders that will probably have one simple rental calculation and they will only be looking at the smaller landlords. I think the changes that are due to take place really play into the hands of the specialist lenders.”