Several lenders, including specialist buy-to-let providers Foundation Home Loans (FHL) and Keystone Property Finance, have upped minimum rental cover expectations for borrowers to 145% in recent weeks as regulators cracked down on affordability in the sector.
Mortgages for Business sales director Steve Olejnik believes that this is just the beginning.
“I expect more lenders to follow suit and amend their rent to interest ratios in the days ahead – the regulators will be watching closely any lender that doesn’t”, said Olejnik.
“Both FHL and Keystone have introduced a caveat to this rule such that borrowers who can demonstrate they are now and are likely to remain basic rate taxpayers, may request the lower stress test.
“Here at Mortgages for Business, we are of the opinion that 145% is only the start and we could see the figure rise further for higher and high rate tax individuals by the time we get to 2020.”
Olejnik said a sharp increase in the use of limited companies for purchasing rental property had been noted as landlords take tax advice and that this will become the norm for the sector. Both FHL and Keystone will retain their stress testing calculations at 125% for corporate borrowing vehicles, which will not be impacted by forthcoming tax restrictions.
“Landlords are realising either the advantages of incorporation or looking to mitigate their personal tax liabilities”, he said. “We are also seeing some landlords move some of their existing, personally owned stock into limited companies, despite the selling costs involved.
“Any new lender entrants to the specialist buy to let sector will need to have a limited company offering. Those that don’t will have completely misunderstood the direction in which the market is heading.”
He expects complex property types such as Houses of Multiple Occupation, multi-units and flats above commercial properties to continue to be popular purchase choices for landlords due to the consistently strong yields.
“We’re are also seeing a slight uplift in mixed use purchases, particularly where office to residential conversions can be carried out”, said Olejnik.
“Classed as commercial, these properties don’t attract the stamp duty surcharge or the interest offset reductions in future tax years.”
Olejnik said he expects landlords to hold back until the results of the EU referendum are known.
“I fully expect the UK to stay in the EU because a majority will be keen to maintain the status quo”, he said
“A vote to remain will keep rates low for some time whereas a Brexit could mean prices start to rise. And no landlord or tenant wants that.”