New Prudential Regulation Authority (PRA) underwriting requirements, effective from next year, could prevent buy-to-let landlords from remortgaging on the open market and potentially mean they will lose out on the best deals.
This is because lenders have been asked to apply tougher income calculation requirements from January that some existing clients will no longer meet.
Currently the standard buy-to-let income ratio dictates rent achieved from the property must cover 125% of the mortgage payment, which is based on an interest rate of 5%. This is set to rise to between 140% and 145%, on an interest rate of 5.5%, in January.
If a client wants to refinance to a better deal, only existing lenders will be able to refinance on previously agreed underwriting conditions meaning affected consumers could find themselves trapped.
Not a ‘cliff-edge’ moment
For Mortgages for Business managing director David Whittaker the issue was “not a cliff-edge moment”.
He suggested most providers would look to offer competitive deals to their clients, new or existing. Even though some may effectively be trapped, it did not mean they would be losing out, he said.
“Lenders now have a decent suite of mortgage retention products that are either equal or better than current [deals]. There should still be a good range of products to chose from provided they don’t change the debt amount,” he said.
On a scale of importance of 1-10 of things to warn clients about this would take about three, according to Whittaker, with things like tax issues for individual buy-to-let landlords taking the top spot.
A moral duty
John Charcol adviser Ray Boulger, however, said brokers have a “moral responsibility” to inform their clients about changes that could affect them, be it in blanket email communications or via their consultants.
“Whether or not there is a duty to, you could argue, it is absolutely good practice for a broker to update their clients when these sorts of things happen,” he said.
The Buy to Let Business managing director Ying Tan agreed: “Without a doubt brokers should be informing their clients about the rule changes, this is part of a good client contact strategy and allows the broker to add value to the client.”
Boulger said brokers would ordinarily be expected to inform clients of all their options, including potential remortgaging issues, during the advice process. The problem was with older and smaller clients, many of whom may not be aware of the latest developments.
Although Boulger did expect to see some increased activity ahead of January he did not expect a “stampede” of clients looking to switch to new deals before the rule change next month.
This was because not all clients were in a position to act on the changes, Boulger said. The way clients were potentially impacted by the new rules depended very much on their personal circumstances.
For instance, for some, early repayment charges would render a quick refinancing deal unjustifiable, while many others were already on low interest deals, so the need to act now was less pressing.
Boulger said: “We saw a rush to complete deals in March before the Stamp Duty changes came in but that was because everyone was affected by it. This is a situation that will affect different people in different ways and some not at all.”
Besides, Boulger agreed with Whittaker that sticking with the current lender did not always spell bad news.
There was also another option, said Tan, which had “not been embraced” by lenders yet, he added. “The PRA has mentioned that like-for-like remortgages with no capital raising are outside the rule,” Tan said.
“However we have yet to see a lender introduce a separate product range for this, [although] this could represent an opportunity for a forward thinking-lender if credit can get comfortable with it.”