The roll out of the new landlord tax relief system has now begun, something which will change the shape of buy to let and the profitability model for landlords for the duration.
Unless there are major changes following this summer’s General Election, September will see portfolio landlords hit hard by the second round of Prudential Regulation Authority (PRA) rules.
All this while lenders and landlords alike are still getting to grips with the PRA’s first crack at tightening criteria.
Even before the first round of PRA regulation came into play in January, the market was feeling its effects.
The new rules stipulate that lenders must stress test their buy to let clients more rigorously and as a result most lenders have now hiked their rental coverage requirements – meaning borrowers must be able to secure much higher rents in relation to their mortgage repayments to secure the mortgage.
This has clearly caused headaches for many landlords and has ruled out some cities (and even regions) for some.
Landlords must be able to achieve higher yields – particularly those with smaller deposits. Therefore, areas like London are falling out of favour, while northern regions where higher yields are still possible seem to be attracting the most investors.
Clearly lenders must adhere to the regulatory requirements. And there is a lot to be said for ensuring buy-to-let borrowers – and, indeed, borrowers in general – are able to weather the storm should we experience another downturn.
However, I am surprised that more are not making use of the transitional arrangements outlined by the Prudential Regulation Authority.
Such arrangements allow lenders to accept clients from other lenders under pre-PRA regulation criteria (as long as it is a pound-for-pound remortgage or the customer is borrowing less than the current balance).
Santander is the first of the major lenders to implement a transitional arrangement and I believe we need to see more lenders following suit.
Until Santander’s announcement it was mainly the building societies (Leeds and Ipswich, for example) who had been supporting buy to let borrowers in this way. You may remember that Ipswich were one of the few who employed a transitional arrangement post-mortgage market review, so I feel they deserve a special mention.
It’s news to no-one that the buy to let sector has been hit hard – and hit repeatedly – in recent years. Implementing a transitional arrangement like this helps to offer landlords some respite and a chance to adjust to the market changes.
So why aren’t we seeing more of this? Goodness knows, landlords could certainly do with some breathing space.