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TMW’s criteria change: The silver lining – Marketwatch

by: Mortgage Solutions
  • 05/05/2016
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The decision by The Mortgage Works (TMW) to increase its rental coverage requirement to 145% and reduce the maximum loan-to-value (LTV) to 75%, could signal the start of a realignment in the buy-to-let sector.

Optimists in the market, on the other hand, are already seeing the opportunities of a criteria change from one of the top two buy-to-let lenders in the vanilla market.

Chris Bramham, Brightstar’s director of specialist mortgages and buy to let, discusses the regional pressures that could arise from lenders’ higher stress rates, while noting the opportunities for new entrants to the market, particularly within the specialist sector.

Jane Simpson, managing director at TBMC, says the move by TMW does not necessarily mean other lenders will follow suit, with many buy-to-let firms still offering access to high-LTV finance.

Doug Hall, director at 3mc, explains that the PRA’s suggestion to exempt like-for-like remortgages from its underwriting proposals means that a sudden surge of deals before the rules are implemented is unlikely.

 

Chris BramhamChris Bramham is Brightstar’s director of specialist mortgages and buy to let

Mortgage brokers have been expecting higher stress rates for some time now. In fact, we have seen this happen over a period of weeks with many lenders changing their stress rates. It will make some properties in the South East unaffordable for landlords because the yields are not as good due to the price verses rent scenario. As TMW is increasing its rental coverage requirement from 125% to 145%, this will have a significant impact on a lot of London and South East deals, highlighting how moving to 145% is a really steep increase.

This criteria change will certainly create more opportunities for new lenders entering the market and some lenders we have recently spoken to are now looking at rental stress which is a little bit more favourable. I think we will also see new entrants coming in and potentially undercutting the high street, not necessarily on price but on stress rental yields.

I think it will definitely put some pressure on buy to let in London and the South East. I can’t see that anyone who has less than two or three properties would realistically see this as a way of creating any income.

There are still lenders who serve the 80% market, including Kent Reliance, Precise and Foundation, to name a few, while a proportion of new entrants are looking at 80% to 85% for professional landlords. Therefore, as the high street tends to flex more towards higher rental stressing, we may start to see more opportunities for specialist lenders to step in and take some of the market share.

 

Jane SimpsonJane Simpson is managing director at TBMC

The move by TMW to restrict its lending to 75% loan-to-value (LTV) and increase its rental calculation to 145% appears to be an early response to the Prudential Regulation Authority’s (PRA) proposals for further regulation of the buy-to-let mortgage market.

This response is not surprising, as taking account of all landlords’ costs and the lower tax relief being phased in next year, a ratio of around 145% would be required. However, this is not to say that all lenders will immediately follow TMW’s lead, as we would expect lenders to develop increasingly sophisticated and individual approaches to affordability tests that take into account factors besides just the current rental income.

It would be surprising if this change causes a drastic restriction in lending in London and the South East although rental yields are sometimes lower in these areas than in other parts of the UK. We may see some landlords increasing rents to make their investments work, however, there are plenty of lenders who have less arduous rent stress tests for properties in these regions.

Some lenders still have a 125% rate stress test and New Street Mortgages, a new entrant to the buy-to-let mortgage market, has a 115% at pay rate calculation for properties in Central London. Properties in the London and the South East are seen as good quality investments as they are most likely to benefit from house price increases over the medium to long term.

For landlords looking for higher LTV finance there are still plenty of options with over 100 products currently available at 80% and 85%. However, our experience at TBMC is that experienced buy-to-let investors who have existing equity in their portfolios will opt for lower LTV products where possible as the rates are so much more competitive at 75% and below.

 

Smiling Doug HallDoug Hall is director of 3mc

Rental cover of just 125% was starting to look thin following the tax changes and my instinct is that other lenders will follow suit. If I’m correct, it will be interesting to see if 145% becomes the new norm for mainstream buy-to-let lenders or whether we’ll see other lenders using this move as an opportunity to differentiate their own offerings.

TMW has made it clear, however, that clients wanting to remortgage on a like-for-like basis will not be impacted by the new stress tests. The PRA’s paper, CP11/16, says that ‘To avoid existing borrowers being adversely impacted when remortgaging, the proposals do not apply to buy-to-let remortgages where there is no additional borrowing beyond the amount currently outstanding under the existing buy-to-let contract’.

Bearing in mind that the majority of buy-to-let transactions are remortgages, a sudden upsurge in buy-to-let transactions ahead of the introduction of the new underwriting rules is unlikely. It should also mean we don’t see the emergence of buy-to-let mortgage prisoners as a result of the new regulations.

This get-out clause will inevitably drive some specialist lenders’ new business strategies and I expect to see them interpret the PRA underwriting guidelines in different ways. For example, some will introduce different rental stress tests for limited companies and individuals, as the tax changes have less impact on limited companies than they do on higher rate taxpayers.

We’re certainly in for a period of change, which could be an opportunity for some specialist lenders to make their mark.

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