Jane King, mortgage adviser at Ash-Ridge Private Finance, says the new rules mean a ‘one size fits all’ approach
Chris Maggs, commercial manager at Accord buy-to-let believes the changes are a positive move for the market.
Shaun Church, director at mortgage broker Private Finance warns there is now less choice for landlords.
I view the new PRA rules as a set of sticks in which the regulators are using to beat landlords in order to cool down the buy-to-let market and supposedly free up properties for first-time buyers.
Lenders are now not allowed to set their own affordability criteria but have been instructed to use new income cover ratios, which has resulted in a ‘one size fits all’ approach that takes no account of regional variations and pricing.
As a result, many landlords are now throwing in the towel and I predict that the ‘amateur’ or accidental landlord will cease to exist in a couple of years, as the regulations take hold and the tax advantages disappear.
I think the majority of landlords remaining in this environment will probably be cash buyers looking for income rather than capital growth or will be die hard investors who will take the increased stamp duty and withdrawal of tax breaks on the chin and a long-term view on the future of this market.
Surely at some point the regulators will realise that they have over-egged this particular pudding and look at this again. Perhaps when they note the unintended consequence of a shortage of rental property available and increasing rents to meet affordability criteria.
Landlords will now, more than ever, need a good mortgage adviser as the calculations and criteria become ever more complex, especially for clients with more than four properties who now have further rules to deal with.
The introduction of Prudential Regulation Authority regulation for landlords with four or more properties has been a positive step for the buy-to-let market.
The new rules promote responsible lending ensuring lenders take a landlord’s whole portfolio into consideration, rather than viewing a mortgage in isolation, to build an overall picture of landlords’ circumstances before making a lending decision.
This can only be a good thing – it helps lenders to manage the level of risk involved whilst ensuring a landlord is not over-stretched.
While it’s caused some confusion for brokers when placing cases as they grapple with lenders’ varying criteria, it’s perhaps a misconception that the changes have caused a major obstacle for the market.
At Accord, our underwriting decisions have always been based on the affordability of a landlord’s overall background portfolio, so the new rules haven’t caused many significant changes for us and ultimately for brokers.
We’ve made changes to how we assess background properties. In addition, we now ask for details of other assets a landlord may have, plus if they have any in-flight applications with other lenders.
This helps us to see what the applicant’s overall circumstances will be once their mortgage completes, and if they have capital to protect themselves should the unexpected happen.
Since the changes on 30 September we have seen an uplift in portfolio landlord applications and believe the changes encourage good best practice across the industry, and protect the interests of all parties involved.
Since the PRA rules were introduced, we’ve found a lot more landlords are falling into the portfolio landlord category than is perhaps necessary.
The qualification of four or more buy-to-let properties is quite restrictive and many landlords who would not otherwise be deemed ‘professional’ are now having to cope with tougher mortgage affordability rules and more complex application processes.
I think 10 buy-to-let properties or more would be a better measure to help achieve the same objectives.
The rules have certainly made lending to these types of landlords more difficult.
There is now less product choice for portfolio landlords and they are increasingly being driven to more specialist options, which drives up borrowing costs.
Having just one underperforming property in a larger portfolio now puts borrowers at risk of failing the approval process.
Some lenders – particularly challenger banks – have responded positively to the changes by upping staffing levels or developing new systems to help cope with the additional administrative requirements.
Others, however, have reacted by scaling back their buy-to-let offering.
The new rules alone have not had a visible dampening effect on the buy-to-let market.
However, the sector was already depressed following a series of earlier regulatory changes, such as the stamp duty surcharge.
The buy-to-let purchase market has been off the boil for a long time, and while these recent changes have not made it significantly worse, they certainly haven’t helped to revive what is clearly a struggling sector – particularly given the context of a quieter overall housing market.