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.

Lender appetite

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 takenby 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 oflending 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.

As the myriad of changes that haveimpacted the buy-to-let sector in recent years are being experienced by landlords, some are looking at different property types to maximise their investment returns. Changes to buy-to-let taxation have affected potential profits for landlords and lenders are using stricter rental calculations to determine affordability. Some landlords have turned to Houses in Multiple Occupation (HMOs) or Multi-UnitBlocks (MUBs) for greater rental yield and portfolio growth.

HMOs

Houses in Multiple Occupation have always been a popular choice with professional landlords looking to increase their rental yields due to the potential provided by having multiple paying tenants. At TBMC we deal with HMO enquiries on a daily basis and we have around 25 different lenders on our panel who consider this property type.

Dealing with complex buy-to-let cases can be rewarding for intermediaries and they can be quite straightforward to place.However, there are a number of factors that always come into consideration when handling HMO applications. TBMC’s experts place these cases every day so here are our top tips for sourcing HMO mortgages:

1. ASTs

Check the number of ASTs yourclient has in place with their HMO tenants. Some lenders accept multiple ASTs and others will only accept one.

2. Facilities

Most lenders will only expect tosee one kitchen and one living room in a HMO. If the propertyhas more you may need to source specialist lenders.

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3. Tenant Type

Your client's HMO might havea specific tenant type. Check criteria for DSS tenants, students and vulnerabletenants.

4. No. of rooms and size

HMO lenders have criteria on howmany bedrooms they will accept in the property. TBMC works with lenders rangingfrom a maximum of 4 bedrooms to those with no limit at all. Checking minimum room sizes is also important as new HMO regulations stipulate a minimum of 6.51 square metres for an adult bedroom.

5. HMO licensing

Check your client's HMO propertyis correctly licensed. Properties with 5 or more bedrooms, occupied by more than 1 household, who are sharing facilities will (as of October 2018) need to be a licensed with the local authority. Lenders willneed the appropriate licences in place before completion. 

Multi-Unit Blocks

Multi-Unit Blocks have also been amongst the most enquired about property types every week since the new year here at TBMC.

Almost exclusively accessible to experienced landlords, MUBs can be valuable assets to portfolios, significantly enhancing profits and helping landlords develop into full time investors. 

For tenants seeking city centre locations and amenities for modern living, MUBs might be a solution for rental demand and perhaps a key feature of the investing market.

TBMC’s experts place cases daily for Multi-Unit Blocks,so here are our top tips for sourcing:

1. Individual units

Most lenders will require eachunit in the block to be individually saleable.

To know what the lenders are looking for let’s break this down into more detail:

- Separate utilities

Each unit must have its own gas,electric and water supply.

- Separate entrances

Each unit must have its own secure entrance be that inside or outside.

- Separate facilities

Each unit might be required to have its own living space, kitchen and bathroom.

2. Unit size

Check the individual units' square footage. Lenders will have a minimum each needs to meet. Exceptions for smaller units can be made where the majority of units meet criteria. TBMC has placed an MUB with one unit at 19 square metres before.

3. Experience

Your client will typically need letting experience when purchasing their first multi-unit block. The average minimum requirement is 2 years' landlord experience.

It is interesting to see the changes in buy-to-let investment strategy as landlords look to find ways of maximising their investment potential and how lenders are developing their appetites for more complex buy-to-let business.