The buy-to-let finance landscape is always evolving, and the sector has proven its resilience time and again. In 2019 we find ourselves in a very different marketplace to, say, a decade ago when we were still dealing with the credit crisis, or even just a few years ago before various tax changes and the PRA regulations were introduced.
Despite a contraction in buy-to-let purchases recently, a healthy remortgage market persists and lenders are still showing a significant appetite for lending to landlords with more providers and products currently available to choose from. In fact, Moneyfacts.co.uk reported in February this year that the number of buy-to-let products in the marketplace was at a decade high of 2162. Only before the financial crisis in October 2007 were there more buy-to-let mortgage products available.
Certainly, at TBMC we seem to be in constant talks with new lenders entering the market or established lenders wishing to extend their propositions in the buy-to-let mortgage space. In just the past few months we have added Masthaven, LendInvest, Zephyr Homeloans, The Mortgage Lender and Hampshire Trust to our ever-expanding buy-to-let panel.
This means that there is healthy competition in the market and some excellent deals for buy-to-let investors. And although some landlords maybe holding off making new purchases, perhaps until the outcome of Brexit is known, there is plenty of interest from existing landlords looking to remortgage with the current rates available in this period of economic uncertainty.
Navigating affordability tests
Recently, some landlords with established portfolios have been taken by surprise at how different lender underwriting is in 2019. Noticeably, the effect the PRA regulations have had on lender rental calculations and how this ultimately affect show much a landlord can borrow based on their monthly rental income.
Most buy-to-let lending applications are subject to the property meeting a rental calculation. This will determine the amount of lending offered, based on the mortgage interest payment being stressed at a specific rate, to ensure the rental income is more than this amount.This gives lenders comfort that the customer can afford their monthly mortgage payments.
Since the PRA regulations in 2017, rental calculations have changed significantly for buy-to-let applications and the way lenders have adopted the PRA changes into their rental stress tests varies.
For example, the applicant’s tax status or the borrower entity will affect the Interest Coverage Ratio (ICR) – typically 125 per cent for basic rate tax payers and limited company applications; and 145 per cent for higher rate or additional rate tax payers.
Product type also affects the rental calculation. 2-year rates which fall within the PRA regulations are subject to a recommended minimum stress rate of 5.5 per cent. Whereas 5-year fixed rates are not subject to the same restrictions and therefore usually have a more achievable stress rate, often at the pay rate.
Some lenders are applying a tiered approach to rental calculations with higher loan-to-value products carrying a higher stress rate compared with lower leveraged loans. Also, the type of property may affect the rental calculation, with more complex applications such as for Houses in Multiple Occupation or Multi-Unit Blocks having a high ICR applied to them.
To add to the complexity of finding a suitable buy-to-let mortgage, some lenders have their own affordability calculators which also factor in other incomings and outgoings for each customer. Other lenders offer a top-slicing facility which factors in additional earned income for applicants who fall short of the rental income requirements.
So, it’s a bit of a minefield out there in terms or determining how much a landlord is likely to be able to borrow, depending on a wide range of factors. It can be frustrating, especially for professional landlords who may face some unexpected challenges when they come to refinance their portfolios.
However, this is also an opportunity for specialist buy-to-let brokers, whose expertise on lending criteria and familiarity with different affordability tests can really add value for their landlord clients.