From stricter PRA guidelines to a reduction in mortgage tax relief, many landlords have now been forced to think twice about expanding their portfolio due to the myriad of changes. However, as we look to the New Year, we can expect to see a jump-start in buy-to-let mortgage activity in Q1 as the wave of borrowers who purchased properties in Q1 2016 look to re-finance.
Stamp duty driving the rush
The number of buy-to-let mortgages taken out for the purchase of new properties in Q1 of 2016 totalled over 49,000. In 2017, this figure wasn’t achieved until eight months into the year. The quarter was something of an anomaly, a period where activity was 2.5 times more than normal. One of the most influential reasons for this jump was the stamp duty surcharge for second properties, introduced in April 2016. Launched in an apparent effort to combat the relentless surge in house prices, the added 3% created a stampede in demand as buyers rushed to complete their applications before the new legislation came into effect.
As a result, March 2016 saw an intensely active mortgage market. According to the CML, gross mortgage lending hitting £25bn, around £4 to £5 bn more than would otherwise have been the case. A large percentage of borrowers who took advantage of this window of opportunity did so on 2-year fixed rate terms, so the first half of 2018 is set to see a surge in remortgage activity as those mortgages reach maturity.
Five-year, fixed rates raging
Meanwhile, five-year, fixed rate products have risen in popularity, largely as a result of the new PRA guidelines, which focus on affordability. As of January 2017, the PRA introduced stricter rules of affordability testing for two-year fixed rate products, meaning that to qualify for a mortgage under the latter terms, borrowers must be able to afford the interest at a percentage greater than the rate offered. For many landlords, the costs incurred as a result of the rising interest rates and reduction in mortgage tax relief mean that they simply cannot afford their mortgage under these terms.
However, affordability testing does not include applications under five-year terms, so landlords are able to borrow more with this arguably more attractive option. As a result, 2018, is expected to bring a greater number of switch overs to the five-year alternative.
One question arising from the new rules, is what will happen to the so-called ‘mortgage prisoners’, who do not meet the latest PRA criteria changes, and will be unable to refinance to another lender. With the increasing pressure on costs, landlords in this bracket, especially in the low-yielding, South-East, are most likely to feel the squeeze and face difficult questions about their business in the buy-to-let sector.
For brokers and lenders, 2017 has been a year of transition, with new regulations and tighter affordability standards creating a new foundation for the buy-to-let market. Both parties must ensure that their systems are up to date, and primed to receive the increase in borrower applications expected in the New Year.
For lenders in particular, capabilities in origination and efficient processes, backed by the intelligence and speed of their technology, are essential to ensure that they remain ahead of the application whirlwind until the buy-to-let sector re-adjusts to the new normal.