While the first set of rules officially came into force this year, many lenders have been phasing in these changes since the middle of last year when the Prudential Regulation Authority (PRA) made clear its intentions for buy-to-let underwriting.
In our first Marketwatch of 2017, we’re asking brokers to tell us their experiences so far with the affordability changes and how lenders are supporting brokers with the rules.
Ying Tan, managing director, Buy to Let Club, names Hinckley and Rugby and Santander as the lenders that have stepped up to the mark in supporting brokers with the changes, but raises concerns that the market is likely to see significant delays in case processing as a result of increased paperwork.
Doug Hall, director, 3mc, believes there are many options out there for brokers and clients that go beyond the rigid 145%@ 5.5% affordability calculation, which he says is an approach which has been widely used by the more mainstream players.
David Whittaker, CEO, Mortgages for Business, notes that the buy-to-let changes are likely to play ‘havoc’ with sourcing systems, but notes some simple ‘strikeout’ rules to determine whether brokers can rely on these platforms.
The first round of changes from the Prudential Regulation Authority may have only been officially in play since 1 January but, as those of us operating in the market will attest, changes to affordability requirements have been coming into effect for months now. Indeed, even without the PRA’s requirement, the changes to tax relief and thus the rising costs of buy to let will have prompted many lenders to re-assess affordability in order to minimise risk.
So far we have not encountered too many problems. A number of lenders, including Hinckley and Rugby, have allowed personal income to support a rental income shortfall which has been a big help to a number of landlords. Specialist lenders have been particularly helpful, which makes sense – buy to let is their bread and butter so it’s in their interests to be flexible where possible. We’ve also had fantastic service from Santander with underwriters on hand to help at any time.
With the changes having such widespread impact, we have worked hard to ensure that our clients are fully prepared; ensuring that they are aware of the new affordability requirements, that they’ve done their figures and know what documentation is necessary.
We may see more disruption in the autumn when the next set of rules come into effect. With lenders required to request mortgage information for every property in a landlord’s portfolio when seeking finance it is undoubtable that the process will take much longer. I imagine we’ll see significant delays purely as a result of increased paperwork.
The new PRA affordability rules have generated a big opportunity for mortgage intermediaries as investors now have far more factors to take into consideration when contemplating how best to finance the purchase of additional properties.
It’s not just a question of affordability, but also addressing issues such as tax banding and whether buying within a limited company is a more sensible route than buying as an individual. Property investors need advice more than ever before, which is good news for intermediaries.
It’s perhaps no surprise that we’re seeing most mainstream lenders adopt a rental stress test based on 145% at a notional rate of 5.5% and I have no doubt that it will be a trend that will continue.
However, it’s by no means the full story. There are a number of lenders using different calculations (3mc has recently sent an email to brokers making them aware of 10 such lenders) and if they are offering five-year fixed rate deals and/or deals for limited companies, then 125% at the pay rate is available which enables investors to borrow considerably more. Some lenders will also offer 125% to basic rate taxpayers.
For example, using a stress test of 145% at a notional rate of 5.5% for a property with a monthly rent of £900 pcm will allow a maximum advance of £135,400. If, however, the same property is financed using a stress test of 125% at a pay rate of 3.49%, then the maximum advance is £247,500 which is a significant difference (and this is a product currently available in the market today).
If brokers have clients wanting to leverage their assets as much as possible, then there are options available and brokers shouldn’t think they are being straight-jacketed by what’s becoming an industry standard 145%@ 5.5% formula.
The new PRA regime regarding interest cover ratios (ICR) and stress tests are a mathematical consequence of the tax changes announced by George Osborne back in July 2015. Anyone who still thinks that these guidelines are non-mandatory and open for debate is deluded.
Consequently, the majority of buy-to-let lenders have now published their new rent to interest (RTI) calculations which only impact personal borrowers. The result is a bit of a minefield of information and it will certainly play havoc with buy-to-let sourcing systems. The split between lenders offering a standard 145% @ 5.5% and those with some form of bespoke solution is evenly balanced. The issue with the bespoke solutions is that they often require significant amounts of background data on the client before you can determine whether their unique solution works for that particular borrower.
Determining whether you can rely on sourcing systems for the best solution for your borrower can be sped up by some simple ‘strikeout’ rules:
- Limited company transactions are not adversely affected by the tax changes.
- If your borrower is doing a like-for-like internal remortgage with their existing lender they should be able to access products on ‘old’ stress tests.
Do this simple test: Most buy-to-let mortgages are below 70% LTV (CML and industry data). Under old stress tests any property yielding above 4.8% would automatically qualify for nearly all lender products. The threshold is now 5.6% unless you’re considering a five-year fixed rate (some are below 4%) where a yield of only 4.1% would be needed. According to our transactional data nearly 70% of buy-to-let purchases are now happening in a limited company, so when added to these simple solutions the number of buy-to-let transactions that need to be tested through individual lender solutions is much diminished.
Lower yielding city centre properties where a borrower wants high debt levels may warrant bespoke solutions, but the lack of transparency on some lender algorithms doesn’t demonstrate lenders working in partnership with brokers; I suspect those lenders will soon discover that brokers will not trust anything that isn’t clear and functional to use.
But a big high five to Precise Mortgages for their well set out ICR bespoke solution which also reminds us about ownership by Tenants in Common, a simple but effective solution where one partner in a relationship isn’t currently working thereby permitting a lower ICR calculation. This may only be suitable for one or two properties but don’t forget many owners of buy-to-let properties aren’t serial investors. How many times have we heard Roger Morris lecturing on this subject? Finally, his own credit department has allowed him to set it out in policy – well done!