Specialist buy-to-let market expands as complexities grow – Alan Cleary

Firstly, for the purposes of this blog, specialist buy to let refers to pretty much anything that is not a vanilla low loan-to-value mainstream buy-to-let mortgage. HMOs, limited companies, portfolio lending, light refurbishment, near prime and lifetime trackers are all good examples.

In my 25 years in the mortgage market I cannot recall a better to start to a year than we have just had in quarter one. All of Precise’s lending lines over-performed on both margin and volume and of course buy-to-let was the star attraction. All of our production is from intermediaries so I know for a fact that brokers, packagers, clubs and networks all had a good start to the year as many customers brought forward purchases of property in order to beat the Stamp Duty deadline.

The CP11/16 document issued by the PRA is part of the framework the government is using to control the growth of the buy-to-let market. I spent pretty much an entire week carrying out an impact and gap analysis and here is what I believe are the likely outcomes of its implementation. There are three core items in the consultation process;

1. Affordability testing – the interest coverage ratio (ICR) affordability test should give consideration to all costs associated with renting out a property that the landlord is responsible for including the impact of the tax changes coming into effect from next year.

2. Interest rate stress testing – lenders must incorporate a minimum of a 2% stress on the initial or reversion rate subject to a minimum rate of 5.5% being used. Unless it is a fixed-rate product of five years or more.

3. Portfolio landlords – any landlord with four or more mortgaged properties will be subject to a specialist underwriting process which the lender must have documented.

I think in general this is a sensible set of proposals which I largely support. Points one and two will not have a dramatic affect on volumes as product design can quite easily accommodate them. Point three is a bigger issue because over 50% of private rental stock is controlled by landlords with four or more properties who, in future, may be subjected to a more detailed specialist underwriting process.

Expect a bigger slice of buy-to-let lending to be classified as specialist from 2017 onwards.