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Advising buy-to-let clients in a shifting market – Marketwatch

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  • 12/05/2016
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Amid warnings that a slew of buy-to-let mortgage prisoners could be created off the back of affordability changes to the sector, this week's Marketwatch looks at how brokers should approach advice to avoid this scenario.

Buy-to-let lender Foundation Home Loans warned brokers last week that they may be at risk of creating mortgage prisoners in light of the Prudential Regulation Authority’s (PRA) proposed affordability changes.

Intermediaries advising their landlord clients to take advantage of today’s lower rent assessments, knowing they are soon to be increased, may be placing borrowers under a future affordability strain.

If the PRA’s tougher buy-to-let assessments are implemented, which looks likely, lenders will need to consider the full costs of owning and maintaining an investment property, and rental cover calculations will need to take into account a 2% stress on the interest rate offered.

Those seeing the opportunity to secure mortgages now, under more relaxed rules, may struggle to remortgage at a later date.

This week we’ve asked our panel of experts how brokers should approach these future affordability issues, now, given it is likely further credit tightening is on the horizon.

Steve Carruthers, head of mortgage distribution at Newcastle Intermediaries, explains that while it may be difficult to predict whether all lenders will follow in the footsteps of TMW, taking into account the wider picture and future context is the safest option for all parties involved.

Andrew Montlake, director at Coreco Group, explains that while the buy-to-let market will inevitably increase in complexity, brokers must ensure their advice remit does not stray into other territories such as tax and investment.

Paul Elliot, sales manager at John Charcol, says that spending more time carrying out the initial fact-find will give both advisers and landlords peace of mind for the future.

 

headshot of Steve Carruthers at Newcastle BSSteve Carruthers is head of mortgage distribution at Newcastle Intermediaries

It’s in everyone’s interests that borrowers can afford the mortgage, and that sufficient rental income will be generated, particularly in challenging times. This is why lenders already apply a rental test that is stressed to consider long-term affordability.

The recent PRA consultation paper creates the potential for mortgage prisoners as some lenders tighten  their affordability criteria. However, the proposed rules also allow lenders to consider remortgage customers where the loan amount is not increasing, similar to Transitional Arrangements under MMR, which offers a  route for those whose current lender is unable to assist. While we haven’t made any firm decisions on how these proposed rules are best utilised for new customers remortgaging with us, we would treat our existing buy-to-let customers fairly.

There have been clear signals coming from the regulator concerning buy to let for some time, which the recent PRA consultation paper provides a degree of clarity around should these become rules. Understanding that lenders are likely to review their lending policies in light of these proposals is a key part of broker foresight. The Mortgage Works has already announced changes to their rental stress test calculation, and other lenders, including Newcastle Building Society, will be reviewing their position.

While brokers can only operate with the criteria available and don’t have a crystal ball, taking account of the wider picture and future context is critical when providing advice. If there are any affordability doubts it would be wise to err on the side of caution.

 

Andrew Montlake CorecoAndrew Montlake is a director at Coreco Group

We all know the buy-to-let market is changing in a way that will, for many landlords, mean some pretty fundamental changes in the way that they run their portfolios and affect the amount of income that they earn.

The changes come in several ways, not just in the form of taxation, but also via the PRA’s guidance that will no doubt see changes to the way that lenders are able to calculate their stress tests and underwrite applications in the future.

In a dynamic mortgage market, changes will always occur and sometimes a borrower will suffer from having to remortgage in tougher conditions or benefit from an easier period; it was ever thus. As brokers, our job is to make sure we advise the client openly and honestly about all the potential issues so they go in to every transaction fully aware.

The complexity around the buy-to-let changes is that we are not tax advisers and so we need to be careful not to stray into that territory. It should not be our job to advise on the suitability of property as an investment when there are other places to invest cash, nor should we advise on whether it is better to put the loan into a company name or not.

We need to be knowledgeable in order to present the facts, make them aware that there are changes taking place and that they should be prepared. They also need to be clear that once all the tax changes filter through, the income they receive may well be less.

Once all of this is made clear and well documented, brokers can get on with recommending the most suitable product for the client.

 

Paul Elliot John Charcol version 2Paul Elliot is sales manager at John Charcol

Given the changes facing the buy-to-let sector under proposed PRA guidelines, mortgage brokers should start considering the implications increased rental stress tests could have on their customers in the years to come.

Just as we found with the implementation of MMR for the residential sector in April 2014, it is clear that suitable mortgage recommendations can only be provided when the broker has a full and detailed understanding of their customers circumstances both now and in the future.

This may mean spending more time with initial fact-finds than some landlords and brokers are used to, however the long-term benefits of doing so will undoubtedly outweigh any additional time and resource spent. It will give both parties the opportunity to discuss a longer-term strategy, to ensure accurate sourcing of the market and the most appropriate recommendation.

Of course there are likely to be some landlords who will be left with limited remortgage options for low yielding properties, however the PRA consultation does address this directly stating that existing borrowers should not be adversely affected where no additional borrowing required.

This should provide some peace of mind that the new guidelines will help avoid the creation of mortgage prisoners and should allow brokers to be assured that as long as they have provided suitable advice from the outset, they won’t leave themselves open to risk of complaints further down the line.

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