Speaking on a webinar, Alex Witham, Landbay’s regional account manager for East of England, said that one way to navigate the current issues facing the buy-to-let market was with a variable fee structure.
“We’re offering products which have the lowest possible APR we can get away with offering to still make it viable, but we’re needing to increase the product fee to ensure it’s a profitable product.
“Please don’t think if we are doing a seven per cent product fee deal to your client over a two per cent fee it means Landbay are making so much more money than on a two per cent fee deal. Essentially, it’s cost neutral to us,” he said.
He explained that the APR was “commensurate” with the fee, so the “lower the interest rate we can possibly offer just means you guys and the clients get a higher borrowing capacity out of that product”.
“The lower the fee, the higher the APR and the higher the APR, the lower the affordability,” Witham said.
How it works
As an example, he said that if there was a landlord case, which had £1,000 rent with 125 per cent ICR, with its two per cent fee option at 65 per cent LTV it would be able to lend £179,775.28 at 5.34 per cent.
However, with a seven per cent fee at the same LTV tier it could lend £221,198,16 with a rate of 4.34 per cent. This is a difference of over £41,000 in terms of borrowing capacity.
Witham said that the different product fees would fit different clients, as some would want cash for capital raise and needed increased affordability, whereas other may not.
He said: “We believe we’ve got 17 products that appeal to any type of client because stressing at 4.34 per cent is going to give you much better borrowing than stressing it at 5.34 per cent but at the cost of a product fee.”
Broker expertise needed ‘way more now’
Witham added that “broker expertise is needed way more now than it has been before” as clients could struggle to navigate ” the raft of affordability [issues], the nuances that lenders have in their criteria” alone and “little things that can trip people up”.
“Brokers are absolutely needed, so this [buy to let] is a market segment that you guys will thrive off,” he noted.
He pointed to rising interest rates putting pressure on Interest Coverage Ratios (ICR), making it harder for some landlords to refinance or secure the rate that they wanted, therefore limiting their borrowing capacity.
Witham explained that ICRs for lower-rated taxpayers typically came to 125 per cent, whilst for high rate taxpayers this was 145 per cent.
He added that the increase in the stress test was to allow for “extra costs” due to Section 24 changes, which removed a landlord’s right to deduct finance costs, including mortgage interest and arrangements fees, from its rental income prior to calculating tax liability.
This means that landlords must pay tax on the gross income they earn from a rental property.
Witham added that another requirement post-2017 reform was that background portfolios needed to be checked, which involved the number of properties and the rent received. He noted that some lenders were going to deeper and looking at savings and assets and other liabilities as well.
“It’s a deep dive now compared to what it once was,” he noted.
Witham added that rental yields were being squeezed, and that this was impacting smaller landlords, especially those who may not be considering whether to incorporate or “cash in and sell”.
