There has been a lot of talk about the buy to let market in the last year or so and Government regulation, tax changes and lender criteria have been changing quite dramatically. Landlords have often been left dazed and confused by what seems like an onslaught of new rules.
Much of the new assessment of BTL’s comes from the PRA paper (Prudential Regulation Authority). This was a Bank of England paper which came into effect in October. It was aimed at lenders and encouraged them to take a more holistic view when assessing BTL portfolios. A portfolio landlord is defined in this paper as being anyone owning 4 or more mortgaged properties. This could be a main residence and three BTL’s or any combination of main residence, holiday homes or BTL’s.
Many highstreet lenders will now only lend to applicants who own less than 4 mortgaged properties and we have seen the more specialist BTL lenders gain much strength in the marketplace in just the last couple of months as they have the time and systems in place to asses these applications.
The PRA paper also insisted that lenders also needed to take into account tax changes to high rate tax payers on BTL income. High rate tax payers have lost their tax relief and lenders have needed to alter their ‘stress tests’ based on this change. BTL lenders have always looked at stress testing the rent received against a BTL mortgage to ensure that there is an allowance for a rise in interest rate and rental voids.
Historically lenders have in general used a calculation of the annual rent divided by a rate of 5% (to take allowance for rate rises) and divided by 125% (to take into account rental voids). This would provide you with the maximum loan available. This has now been increased for high rate tax payers to the annual rent divided by a nominal interest rate of 5.5% then divided by 145%. To put this into monetary values. An annual rent of £12,000 on the old system would allow borrowing of £192,000 whilst on the new system allows only £150,470. Same rent, same property but the borrowing available is now £41,530 less.
Not all is lost. There are ways around this! Many lenders can offer better stress test calculations if you fix the rate for 5 years, BTL’s owned in a Ltd company name can access a lower stress test and there are more options available. Knowledge is king in this environment and as the BTL market shifts away from the highstreet towards new innovative lenders getting the right advice is paramount.
Sarah is a director at Fox Davidson Mortgage Brokers in Bristol. firstname.lastname@example.org
Tel: 0117 989 7950