The financing landscape for landlords has changed dramatically in recent times.
To understand why, we need to retrace our steps and look at the history of BTL finance in the UK.
Buy to let mortgages were first introduced in 1996. Prior to that, landlords had purchased using cash or specialist rudimentary mortgages for investment.
The introduction of the buy to let mortgage opened up investment to the masses and was a primary driver behind the growth of the private rented sector.
However, in the 2000’s, banks became somewhat complacent with their underwriting procedures, and it became very easy to get a BTL mortgage - too easy in fact - especially as some mortgages became self-certification.
This was combined with high loan to values - sometimes up to 90% LTV, meaning landlords could buy a BTL property only putting in 10% of their own money.
The result of this easy money was two-fold:
1. Landlords with poor and unstable financial circumstances were still able to borrow large sums of money.
2. Many landlords over-leveraged and scaled up too quickly, often operating in negative equity and/or negative cash flow situations, hoping that capital growth would make the risk worthwhile.
Then the UK experienced the financial crash of 2008.
Many property commentators attributed the crash to the fact that money for BTL had been too easy to come by.
After the crash, BTL mortgage products became less prevalent and less competitive, self-cert mortgages disappeared, and lenders adopted stricter underwriting protocols.
However, the private rented sector continued to expand and this drew the attention of the Treasury and the Bank of England who feared that BTL lending could prompt another financial crash and also impact negatively on the housing market, supposedly driving up house prices.
For this reason, the Bank of England introduced the Prudential Regulation Authority guidelines which were embedded in two roll-outs in 2015.
1. 1st January 2015
Affordability assessments should now take into account: borrower’s costs including tax liabilities, verified personal income (where used by the lender) and possible future interest rate increases. When setting the expectations for future interest rate increases, the PRA reviewed the prevailing standards in the industry and considered the impact of changes in interest rates, and calibrated the stressed rate accordingly.
2. 1st October 2015
Lending to portfolio landlords (defined by the PRA as being those with four or more mortgaged buy-to-let properties) should be assessed using a specialist underwriting process to include portfolio spreadsheet, business plan, tax position of landlord etc.
The correct deal stacking calculation is now:
Monthly rent x 12 divided by 5.5% divided by 145%
This will show you how much borrowing the rent will support under PRA guidelines, although there are some lenders who have reduced some of the stress testing.
So, in essence, it is now harder to get buy to let finance, the LTV’s are lower, meaning a larger deposit, and you have to jump through more hoops, especially if you a portfolio landlord.
For new landlords, this is the “new normal” and they will typically have put in larger deposits, look for high yielding properties to stack up, and likely grow portfolios more slowly as a result.
For established landlords coming to the end of a mortgage term, the PRA guidelines could cause them issues when looking to re-finance, especially if they have poor equity and cash flow.
Many landlords are already finding that they need to put in a lot more cash to get re-finance and they are also finding a lack of appetite for lending in the “portfolio landlord” space.
Combined with the introduction of Section 24, this is creating challenges and these are discussed in this informative video by Shawbrook Bank:
Here are MakeUrMove, we believe that working with a reputable and experienced mortgage broker is more important than ever. The broker can direct you to the lenders and products that work for your personal situation and the deal you are trying to finance.
A mortgage broker is a vital part of your support team which should also include a letting agent, tax advisor, and solicitor.
The landlord game is changing and landlords need to be more professional, minimise their costs wherever possible, and maximise their rental returns.
MakeUrMove understands this and we can play our part by getting your property rented as soon as possible, thereby reducing voids, and minimising your management costs with our fixed fee fully managed which costs £65.00 including VAT.
We also aim to be part of the landlord education process, sharing insights, news, and views and invite you to check back regularly for up-dates that will help you achieve a profitable and compliant landlord life!
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