Shawbrook predicts flight to HMOs to ease blow of PRA rules

The specialist lender said the stricter regulation meant landlords would need to adjust to lower levels of available debt and will therefore require more equity, or grow at a slower pace than was previously possible.

As a result, higher-yielding products will become more attractive to investors, including flats, multi-units, HMOs and mixed-use schemes, property finance managing director Stephen Johnson (pictured) said.

His comments echoed those of fellow lenders who said they believed the rules would create a more specialist buy-to-let market, in which more landlords opt to run bigger businesses, while marginal players are being pushed out.

Under new regulation phased in from January, PRA-regulated lenders must use strict affordability tests when assessing buy-to-let applications. These will take the form of either an interest coverage ratio test or an income affordability test.

Rental incomes will need to be enough to cover mortgage interest rates of at least 5.5% during the first five years of the buy-to-let contract, while affordability tests will take into account the borrower’s personal income to support the mortgage payment as well as tax liabilities and possible interest rate increases.

Johnson said: “We are likely to see a potential shift in investor strategy to higher yielding properties such as flats, multi-units, HMOs and mixed use schemes. In addition, potentially different regions where higher yields exist may become more attractive to investors.”

But he warned the strategy could lead to investors taking on more risk or lower capital gain potential in the longer term.

Another option, longer term fixed rates, which are excluded from the stressed interest rate requirement, may also enable higher gearing, Johnson said, but he added: “investors need to make sure they are able to refinance at expiry or they risk being left on high reversion rates without the ability to refinance.”

What’s more, under the new rules portfolio landlords – those with four or more mortgaged buy-to-let properties – will be assessed using a specialist underwriting process.

To find out more about HMO property investing read the latest blog from Liz Syms, chief executive of Connect for Intermediaries, on our sister title Specialist Lending Solutions.