It’s easy to forget that the Mortgage Credit Directive caused a lot of debate over how lenders would interpret the new regulation after making all the necessary changes in order to facilitate it. The good news is the majority of lenders made those changes and the event passed without any major distractions.
Then came the first of a number of government moves to curb buy-to-let enthusiasm in April with an extra 3% Stamp Duty introduced, we all witnessed the stampede before the deadline.
We can already see the impact on purchases, with a slowdown in housing transactions and a market shift towards remortgages and product transfers (clearly topical at present), expected to be the theme of 2017. Although unwelcome, in hindsight the extra Stamp Duty cost felt like the calm before the storm.
The advent of tax changes saw most lenders move to increase their rental coverage ratio (RCR) to 140% or 145% to cater for the increased tax liability impacting higher and top tier tax payers. A long time in the making, we made a decision to create a slightly more innovative solution. BM Solutions’ calculator-based system is designed to reflect an individual’s tax position rather than apply a one-size-fits-all solution. This has been extremely well-received by brokers, particularly because it prevents basic rate taxpayers, who haven’t seen a change in their tax position, from having to make a higher RCR unnecessarily.
The new Financial Policy Committee (FPC) powers of direction left many of us watching intently for further moves to ‘control’ buy-to-let lending activity, before the Prudential Regulation Authority (PRA) consultation sent further mandatory change rippling throughout. The ability to use a different stress rate for five-year fix may be a positive step, but we can expect the regulator to be staying close.
Adapting to new regulations and processes, including longer-term underwriting standards – another in the landlord pipeline for those with four or more properties – is going to prove a fresh challenge for lenders. Given the amount of time that it can sometimes take to get these processes right, I wouldn’t be surprised if lenders are already working on potential solutions even though the changes take effect from the end of September.
Landlords are a largely resilient bunch but they are expecting this raft of changes to have a knock-on effect on profitability. There has been much talk of late about limited company buy to let and how landlords could either restructure existing portfolios or cater for the future in such vehicles in order to mitigate. While clearly this is a good option for the right person, it isn’t necessarily the best option for everyone and getting the right independent tax advice is fundamental if landlords are to seek the best outcome.
It will be interesting to see how last year’s big challenges will play out for the market and how it will adapt to meet them. One thing is for certain though, the sheer volume and pace of change has afforded less time for innovation as lenders invest time, resource and funds in merely remaining compliant or simply keeping up.
As well as remaining resilient, the market continues to play a key role in helping to address the UK’s housing shortage. Our recent landlord panel research found landlord confidence has bounced back strongly – almost back to pre-2015 Budget levels.
Landlords remain confident about the future prospects of their own letting businesses as tenant demand overall remains healthy. This confidence is buoyed by rental income and profitability remaining strong, with a quarter of landlords now looking to increase their portfolios amid the current low interest rates regardless of the challenges still to come.
The private rental sector will continue to provide valuable options and flexibility within the housing market, and despite an expected slowing of the UK economy resulting in further strain on the housing transactions next year, this will reinforce the market focus on remortgage and product transfer options.
However, what’s clear is that brokers will be at the very centre of meeting borrowers’ needs in almost every scenario anticipated this year, and that’s not only an exciting but also valuable place to be.