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As the end of the financial year approaches, buy-to-let investors will be mindful that mortgage interest tax relief will be phased out completely in April. The effects of this tax change have been implemented in stages over the last three years, giving landlords the chance to plan and adapt to its financial consequences.
The significant rise in limited company buy-to-let mortgages is a clear indicator that many landlords are considering the tax advantages of using a corporate structure for their property investment businesses. Around 35 per cent of applications at TBMC are currently for limited companies and we are frequently asked by direct clients whether or not it is a good option for them.
This is not a question we can readily answer as the financial implications of using a limited company will vary depending on individual circumstances and portfolio size. We always recommend seeking tax advice, but intermediaries can also provide information that could assist in the decision-making process. For example, if a landlord client is seriously weighing up the benefits of setting up an SPV, providing mortgage illustrations for both personal name and limited company products could help calculate the overall cost savings involved.
Historically, limited company finance has tended to be more expensive than personal name finance although the gap is narrowing,and some lenders no longer distinguish between the two applicant types. In any case, it can be useful for landlords to be able to compare potential monthly repayments when deciding which route to take. TBMC’s Sourcing and Quotation system has a simple built-in filter for limited company products enabling brokers to obtain comparable mortgage illustrations without entering a complete fact find.
It is difficult to predict what effect the current political and economic climate will have on interest rates in 2020 as Mark Carney prepares for his departure from the Bank of England and Andrew Bailey gets ready to step in.
It has also been predicted by industry pundits that the buy-to-let remortgage market will slow in 2020 as more landlords are choosing 5-year fixed rates which lengthens the remortgage cycle for intermediaries arranging finance for them. However, mortgage rates are still very low and now could be a good time for landlords to examine their whole portfolio to make the most of these deals.
If landlords start to feel more confident about the UK economy in the coming months and are considering expanding their portfolios, releasing equity from existing properties is a popular way of providing a deposit for a new property purchase. There are plenty of options to choose from for all property types and situations, including many that come with incentives such as a free valuation and free legal fees.
For clients looking for a like-for-like remortgage, switching lender is not the only way to secure a lower rate. There is now a growing number of lenders who offer retention products to existing customers which can provide a quick and easy way to refinance.
For brokers working in the buy-to-let sector there will be plenty of opportunity to support their clients in 2020 and being aware of the issues landlords face will enable them to provide a much needed and valued service.
It is expected that gross buy-to-let lending in 2019 will be recorded at around £37 billion but what are the prospects for this sector in 2020?
Some industry pundits have suggested that buy-to-let lending may fall slightly during the coming twelve months as the relatively buoyant remortgage market in 2019 begins to slow; more landlords are now choosing 5-year fixed rates rather than shorter term products which is lengthening the remortgage cycle.
The trend for longer term fixes was stimulated by the 2017 PRA regulations impacting affordability assessments and rent stress tests. For our buy-to-let mortgage business, over fifty per cent of applications were for 5-year fixed rates in 2019.
The purchase market was sluggish in 2019, due in part to the reticence among professional landlords caused by the uncertainty surrounding Brexit. However, following the general election in December and the success of Boris Johnson’s ‘Let’s get Brexit done’ campaign, the path ahead seems clearer; we are definitely leaving the EU.
Now that the political furore of 2019 has abated, there may be a boost to the buy-to-let sector as portfolio landlords release a pent-up demand for new property investment and begin resurgence in the appetite for purchase finance.
It is certainly a good time to obtain buy-to-let finance as strong competition in the marketplace has led to prices being driven down, with rates currently below 1.50 per cent with some High Street lenders, but rates may have bottomed out.
There is still economic uncertainty in the UK as we endeavour to leave the EU in the best possible circumstances and until the new Governor of the Bank of England is in situ. Depending on Brexit developments and other socio-economic factors, there could be some movement in interest rates in the coming year, although a difficult thing to predict without a crystal ball.
What does seem clear is that lenders have a strong appetite for buy-to-let business and some have adapted their lending criteria to widen their appeal to landlords. For example, there are now more lenders offering buy-to-let finance for expats, limited companies, HMO landlords and AirBnB.
This trend is likely to continue in 2020 with lenders modifying their propositions as the demand for more specialist or ‘complex’ buy-to-let mortgages continues. Recently published figures from UK Finance for buy-to-let lending in 2018 indicated that specialist lenders recorded higher rates of growth compared to banks and building societies.
However, following the PRA regulations relating to ‘professional landlords’ (those with 4 or more mortgaged buy-to-let properties), there is still a divide between those lenders servicing large property portfolio investors and those opting to limit their offering to smaller scale landlords. This is likely to remain the case in 2020, with lenders deciding on their target market and honing their propositions accordingly.
Pretty shortly, the general election results will be known and there maybe a clearer picture of how Brexit is going to be delivered. Alternatively, there could be further delays and more confusion surrounding the final outcome for the UK.
Political party manifestos often contain starkly different promises on key issues and it’s probably safe to assume that the election winner will not deliver all of them. It is difficult to predict what effect there will be on the economy and whether any significant tax changes will be implemented in 2020.
Regardless of the party in power, the UK will probably still be a viable option for foreign property investors, especially if the weakened pound persists during the next phase of Brexit. The property market in Britain has always attracted overseas investment and is also a popular investment strategy for British expatriates living abroad.
We frequently receive enquiries for expat buy-to-let mortgages and over the last 12 months there has been an increase in the number of lenders and products available for UK citizens living overseas. In fact, we have over 20 buy-to-let providers on our lender panel offering financial solutions for expats.
Due to the myriad of options available, buy-to-let expat cases can be relatively straightforward to place. However, there are some key criteria points worth being aware of when arranging expat finance.
Although a rather obvious place to start, country of residence is an important factor when assessing the product options available. Most lenders will accept any EEA country, others will include any that are on the FAFT list, and some lenders publish a specific list indicating the countries they will or won’t lend to. It is quite surprising how many places in the world are acceptable residencies for expat applicants, however the majority of our expat clients live in the EU, USA, Hong Kong or Singapore.
Most lenders will require applicants to have a UK bank account and an existing property in the UK (either residential or buy-to-let). As some expats sell their residential property before moving abroad this can be a stumbling block, however there are a few lenders who will consider applicants without a UK property including Saffron Building Society and Skipton International.
Expat lenders usually have specific requirements around employment status, preferring applicants who work for a multi-national company with a higher minimum income threshold, for example, £40,000 for The Mortgage Lender or £50,000 for Interbay. Self-employment income requirements are sometimes higher still.
Minimum loan sizes can also be an issue with expat buy-to-let cases as the threshold is usually between £100,000 and £150,000 with most lenders. However, Saffron Building Society is one of our most popular expat lenders with a minimum loan size of £30,000, neither a minimum income requirement or any specific restrictions on country of residence.
Another competitive provider in the expat space is Foundation Home Loans offering some of the most attractive rates in the market, but they will only accept limited company applications. Keystone products are also priced keenly,and they will accept both personal name and limited company applications.
Our free online buy-to-let sourcing system has a built-in search filter for expat mortgages and is a useful tool for brokers to use when researching the market for the best expat deals. Although there is normally a premium to pay for expat finance, we have hundreds of options to choose from currently starting at 2.49 per cent.
Expat buy-to-let mortgages aren’t necessarily more difficult to arrange but asking the right questions at the outset can help save time.
The buy-to-let mortgage market has come under pressure in recent years due to the multitude of tax and regulatory changes aimed at the sector. However, lenders are demonstrating their willingness to support landlords with a strong appetite for business and a renewed sense of innovation from some providers.
There are more lenders and products available now than there has been in the last ten years and a healthy competition is playing out among them, which means that there are some excellent deals for buy-to-let clients.
Lenders are not just competing on price though. Some are looking at ways to meet more specific requirements that result from the varying demands of landlords. For example, there is a good choice of lenders who offer top-slicing, or rental top up, facilities to support applicants who may fall short of the more stringent rent stress tests in the current marketplace, but who can comfortably afford the monthly payments with surplus earned income.
There are now more than 10 lenders on the our lender panel who offer a top slicing facility, including the likes of Hinckley & Rugby Building Society, Axis Bank and Precise Mortgages. These schemes are targeted at landlords with surplus earned incomes to support their affordability assessment, however our most popular lenders are still those without any minimum income requirement such as Vida Homeloans, Foundation Home Loans and Zephyr Homeloans.
We are also seeing lenders launching special offers with unique schemes that sit outside of their normal product ranges. For example, Foundation Home Loans have recently released an early remortgage special for landlords looking to refinance within 6 months of purchase which is proving popular. There are 2-year and 5-year fixed options which are now available to portfolio and non-portfolio clients.
Foundation Home Loans also have some “ERC 3” products which are 5-year fixed rates that only have Early Repayment Charges for 3 years and could be an attractive option for landlords who may need to refinance before the fixed term is up. It is worth being aware of these schemes as they will not necessarily be the cheapest rate but could be a better choice in certain circumstances.
It is a current trend that 5-year fixed rates are often the preferred option in today's marketplace, accounting for over 50 per cent of new buy-to-let mortgages. However, in this period of economic uncertainty some buy-to-let investors may be interested in even longer fixed rates, especially as interest rates are still relatively low. There are a number of 7-year and 10-year fixed rate options currently available which may suit some clients.
It is apparent that lenders are starting to think outside of the box in terms of product design and looking for ways to provide financial solutions for landlords in this ever-changing marketplace and there are now options beyond the mainstream that could help them.
The government has introduced new rules in England, banning landlords and agents from charging fees to tenants associated with setting up or maintaining a tenancy and capping tenancy deposits at a maximum of five weeks’ rent.
Designed to allow tenants to see, at a glance, what a property will cost them in advertised rent, the Tenant Fees Act 2019, applies to all new or renewed tenancy agreements, student lets and licences to occupy housing in the Private Rented Sector (PRS) signed on or after 1 June 2019 – and to all applicable tenancies and licences in the PRS from 1 June 2020.
Allowable fees and charges
Put simply, the only payments that landlords or letting agents can charge to tenants in relation to new contracts are as follows:
- a refundable tenancy deposit, capped at no more than 5 weeks’ rent where the total annual rent is less than £50,000, or 6 weeks’ rent where the total annual rent is £50,000 or above
- a refundable holding deposit (to reserve the property) capped a no more than 1 week’s rent
- payments associated with early termination of the tenancy, when requested by the tenant
- payments capped at £50 (or reasonably incurred costs, if higher) for the variation, assignment or novation of a tenancy
- payments in respect of utilities, communication services, TV licence or Council Tax
- a default fee for late payment of rent and replacement of a lost key / security device giving access to the house, where required under the tenancy agreement
Any fees that aren’t on the list are prohibited and the government’s guidance makes it clear that landlords and agents can’t charge for:
- admin activities or time taken to set up a new tenancy, including reference checks or credit referencing
- providing an inventory
- checking a tenant out at the end of a tenancy
- a professional clean at the end of the tenancy (although landlords may request that a property is cleaned to a professional standard); and
- wear and tear
Prohibited payments are outlawed under the ban and landlords can’t get round the rules by asking tenants to undertake and pay for these items via a third party.
In most areas, the Trading Standards authorities will be responsible for monitoring and enforcing the rules. A breach will usually be classed as a civil offence, carrying a financial penalty of up to £5,000. If a further breach is committed within five years of a financial penalty or conviction, it will be treated as a criminal offence, subject to an unlimited fine.
Landlords will also have to refund any unlawful fees to tenants.
Savings for tenants
The government estimates that implementation of the Tenant Fees Act will save tenants across England at least £240 million a year, or up to £70 per household.
However, ARLA (The Association of Residential Letting Agents) is less sure, and questions whether landlords will be forced to increase rents to cover at least some of the costs.
What’s clear is that landlords can no longer add on fees over and above the headline rent, except for a very limited set of circumstances.
The Government’s consultation, A new deal for renting: resetting the balance of rights and responsibilities between landlords and tenants, draws to a close on 12 October 2019.
Implementation of the key proposals – removal of the Assured Shorthold Tenancy (AST) and abolition of the Section 21, no-fault eviction process – if adopted as planned, will mark a landmark moment for the PRS.
Interestingly, both measures were brought in as part of the Housing Act 1988 and both helped to encourage investment in the sector by enabling much more flexible arrangements, not only for landlords but also for tenants.
The expansion of the sector is well-charted and, with one in five people now relying on the UK’s Private Rented Sector (PRS) for a home, the Government hopes its proposals will introduce greater security for those tenants who need it, whilst maintaining flexibility for those who don’t.
If implemented, the proposals mean all new tenancies will either be an assured periodic tenancy – effectively an indeterminate tenancy - or an assured fixed term tenancy, which reverts by default to a periodic tenancy.
Tenants will be able to end a tenancy with two months’ notice.
Landlords, in contrast, will only be able to end a tenancy where they can prove they have legitimate grounds under Section 8 of the Housing Act, with a notice period of between two weeks and two months depending on what those grounds are.
Section 8 does already give a wide range of grounds, including a breach of tenancy agreement, such as rent arrears or damage.
However, it doesn’t allow for a situation where a landlord is looking to move into their own property or to sell it and the government is proposing an update to accommodate this change.
Equally critical for landlords is the process they need to follow if a tenant refuses to leave at the end of the notice period.
Today, whether using Section 21 or Section 8, landlords need to make a court application for possession if they find themselves in this situation.
However, while landlords using Section 21 can follow an accelerated possession process where appropriate - making a formal court hearing unnecessary in many cases - landlords using Section 8 don’t have this flexibility.
Few would argue the court system is sufficiently resourced to manage the increase in workload these proposals will deliver and indeed the government is exploring whether to introduce a specialist housing court.
However, given that the median time from claim to possession using the court process is currently 16 weeks and a survey of our landlords showed 85% feel this should be eight weeks or less, a solution needs to be found and found quickly.
Download NLA’s guide on how government changes to Section 21 will affect landlords
At TBMC, we have seen a significant rise in the number of limited company buy-to-let applications being submitted. Since the beginning of 2019, over 25 per cent of new business each month has been in the name of a Special Purpose Vehicle or trading company.
This comes as no surprise as there are several benefits to using a corporate structure for running a buy-to-let property business. Many landlords opt to use an SPV as it can be financially advantageous and tax efficient. Since the government announced the phasing out of mortgage interest tax relief by 2020, there are now more reasons to consider the limited company route to reduce tax liabilities.
In terms of buy-to-let mortgage options, limited company products can also provide advantages to landlords as the PRA regulations relating to rent stress tests are not applicable. This means that the rental calculations can be more achievable for SPVs – typically at 125 per cent at 5 per cent or at the pay rate for 5-year fixed rates – which may allow applicants to borrow more through a corporate structure.
There is growing competition in the limited company buy-to-let space - TBMC has around 30 different lenders on its panel - which means that there are some keenly priced rates available. Historically, limited company mortgages were considerably more expensive than personal name rates, but the gap is closing with some lenders now offering the same rates for both applicant types.
Setting up an SPV is a simple, cheap process which can be completed online within 24 hours via Companies House. Most lenders will lend to newly established SPVs providing they are set up for the sole purpose of letting and managing property. For this reason, it is important that the limited company is registered with the correct SIC code – normally 68100, 68209, 68320 or 68201.
Some buy-to-let clients choose to apply via a company that trades in some other business besides property. There are options for trading company mortgages,but the choice of lenders is reduced for this scenario.
For existing landlords who are considering transferring their properties to an SPV it is always recommended that they seek professional tax advice before proceeding. Moving properties from a personal name to a corporate entity involves a sale and purchase transaction which means that Stamp Duty Land Tax and Capital Gains Tax is payable.
Stamp Duty costs may be a deterrent to large portfolio landlords,but there are circumstances where incorporation relief may be granted by the Inland Revenue if it can be demonstrated that the portfolio is run as a business partnership – again tax advice is recommended in this scenario.
It is possible that the proportion of buy-to-let mortgages arranged via SPVs and trading companies will continue to grow over the next 12 months as landlords realise the financial ramifications of the changes to mortgage interest tax relief once it is phased out completely in 2020.
This area of buy-to-let presents a good opportunity for brokers to help their landlord clients and doesn’t need to be complicated. Limited company mortgages are processed in the same way as personal name mortgages and may provide advantages for buy-to-let investors.
At TBMC we are always looking for ways to make the processing of buy-to-let mortgage applications more efficient. An aim which is shared by all parties involved in the process - landlord clients, brokers and lenders. We all want cases to complete and as quickly as possible.
As a provider of specialist packaging for buy-to-let mortgages we sometimes experience backlogs with the lenders on our panel. This may cause further delays in the processing of complex cases which can be frustrating for brokers and their landlord clients. However, we have also found that the presentation of cases in the first instance can also cause delays in the process too - often simple things like fully completing the application form and sending the correct supporting documents can make a difference.
Top 5 Tips
Below are our top five tips for helping ensure that your buy-to-let cases are processed as efficiently as possible when dealing with a packaging service such as TBMC:
These are just a few suggestions that may help improve your experience with tricky buy-to-let mortgage cases.
Myth: Using a packager means cases take longer.
Fact: Some of the cases we process are highly complex which can lead to an increased amount of paperwork required by the lender in order for them to become comfortable with the deal. More complex cases will also require a higher level of underwriting,which can increase timescales. However, all of this is done in order to get the case offered and give the customer the mortgage they require. Whilst it might take a little longer than a vanilla case and seem to be more labour intensive,it does mean you are able to place those more difficult cases, earn more money,and TBMC will do most of the work for you.
Myth: Packagers don’t add value to my business.
Fact: A specialist packager can be especially helpful when trying to place more complex buy-to-let cases such as those involving multi-unit properties, limited company applications,expat clients or unusual circumstances that won’t fit with a high street lender. TBMC’s buy-to-let support team can provide you with the comprehensive product and technical information you need to enable you to make informed recommendations for your clients.
For more complex buy-to-let cases, using a packager with expertise can speed up the process of identifying suitable products and our relationships with underwriters can help get decisions made quicker. TBMC has an online application form which means that if a case gets declined for any reason, we can switch it to a different lender with no additional paperwork.
Myth: I don’t need to use a packager as I can go directly to the lender.
Fact: A specialist distributor such as TBMC can provide you with access to lenders that are not on your main network or club lender panel and therefore provide more options and potentially better deals for your clients. We also have access to lenders that only allow specialist distributors to submit business.
Myth: Better procuration fees are paid by going direct to a lender.
Fact: Procuration fees paid by TBMC are highly competitive and are usually comparable to those paid directly by the lender. Also, some of the more specialist lenders that can only be accessed via a packager may pay higher procuration fees than high street lenders.
Credit slip-ups might affect a buy-to-let landlord’s options when it comes to new lending. When these clients fail to meet high-street requirements, TBMC can help with access to specialist lenders geared for these otherwise suitable applicants.
Lenders usually give a clear breakdown of the adverse limits they will accept. Checking your client’s credit report gives you the facts needed to source the right lender before adding any unnecessary credit searches to their current file. Things to consider:
CCJs, defaults, mortgage and credit arrears:
· how many
· current status
· when were they incurred
Debt management plans, payday loans and bankruptcy:
· when were they registered
· satisfactory conduct
· Often these scenarios are subject to the underwriter’s discretion.
Lenders like Foundation Homeloans, Bluestone and Together Money can offer solutions through tiered product ranges defined by your client’s credit profile.
If you have any tricky buy-to-let cases that you would like to discuss with an experienced specialist, TBMC can help you place the applications with suitable lenders for your landlord clients.
The buy-to-let remortgage market in very healthy, accounting for around 65% of enquires at TBMC and presents a great opportunity for intermediaries.
Remortgaging applications may include capital raising – borrowing funds above those currently owed to an existing lender for other uses. Where your client has equity available, raising additional funds through a remortgage might provide a solution to their modern financial needs.
Lenders can be quite flexible about the purpose of the capital raising and typical reasons include:
· buy-to-let or residential deposit or purchase
· personal expenditure
· property improvement and refurbishment projects
· debt consolidation
· business purposes or investments
· application costs
Some lenders simply state that raised capital can be used for ‘any legal purpose’.
Your client will need to disclose what they intend to do with the capital raised as lenders will want to know where their funds are goings and that they’re being used appropriately. The client may need to provide evidence too. For an onward purchase, a decision in principle illustration may be requested.
TBMC offers a diverse range of remortgage products including free valuations, paid legal fees and up to 85% LTV lending to meet your clients’capital raising needs.
Research shows that in 2018 over half (59%) of England’s landlords are aged 55 years or older and one third are retired. Buy-to-let lenders have started to incorporate the market’s age demographic into their lending policies by identifying the pitfalls for later life applicants and then implementing the necessary changes to remedy this.
Lenders impose a maximum number of years an applicant can have a loan for and so for older applicants the loan term may be restricted. This in turn could affect the affordability of the loans as shorter terms might equate to higher monthly payments. It is worth checking how lenders assess affordability, particularly whether state pensions are considered when calculating minimum income criteria.
Lenders are changing their criteria to make buy-to-let finance more accessible to older landlords. For example, some lenders no longer stipulate a maximum at application or completion. There are also longer-term fixed rates up to 10 years which can offer affordability relief and security of monthly payments. Variable and lifetime products may also provide a solution. Pensions including private, widow’s and war pensions are becoming more widely accepted by mortgage lenders and existing landlords may also be able to use rental income in their income credentials.
Landlords are not a homogenous group of people and their investment property choices and portfolios are diverse. At TBMC we get a wide range of enquiries and there are many niche areas of buy-to-let lending that are of interest to our clients.
Holiday let investments
Holiday lets have become a popular choice for landlord clients in recent years. A rising increase in Brits holidaying at home in the UK has generated the rental demand and increased mortgage options are now available for those looking for a unique investment opportunity.
Sourcing holiday let mortgages is slightly different from regular buy-to-let and there are certain points to check with your clients at the outset:
This is an area of buy-to-let finance that seems to be gaining interest, with several specialist lenders recently extending their propositions to include options for holiday lets.
We frequently get enquiries about ex-council properties at TBMC, which can be an attractive investment proposal for some landlords. There is a good selection of lenders offering lending on ex-council houses without too many caveats, however most lenders on our panel are more prescriptive when it comes to ex-council flats.
Specific lending criteria for ex-council flats includes limitations on the maximum number of storeys in a block of flats e.g. Barclays has a maximum of 7, Shawbrook has a maximum of 10 and Aldermore will only accept up to 4.
Certain lenders will offer lower loan-to-value products for ex-council flats and others require that the block has a certain percentage of private owner-occupiers e.g.both State Bank of India and Landbay require 50 per cent to be privately owned.
Some lenders prefer not to lend on flats with deck access and other lenders may impose more restrictive minimum property values for ex-council properties, such as Kensington with a minimum value of £200,000.
Although sourcing mortgages for niche buy-to-let requirements can be quite specialised with more limited options, these cases can be quite straightforward to place if you apply the right knowledge of lending criteria and the determination to pursue a solution for your buy-to-let clients.
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.
As the myriad of changes that have impacted 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-Unit Blocks (MUBs) for greater rental yield and portfolio growth.
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:
Check the number of ASTs your client has in place with their HMO tenants. Some lenders accept multiple ASTs and others will only accept one.
Most lenders will only expect to see one kitchen and one living room in a HMO. If the property has more you may need to source specialist lenders.
3. Tenant Type
Your client's HMO might have a specific tenant type. Check criteria for DSS tenants, students and vulnerable tenants.
4. No. of rooms and size
HMO lenders have criteria on how many bedrooms they will accept in the property. TBMC works with lenders ranging from 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 property is 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 will need the appropriate licences in place before completion.
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 each unit 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.
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.
As we look ahead at the buy-to-let mortgage market in 2019, there are some known trends and veritable uncertainties as to how the marketplace,economy and general activities of landlords will develop.
The buy-to-let sector is subject to numerous influences, including social, political and economic factors, which means predicting the level of activity in this segment of the mortgage market is very difficult without are liable crystal ball.
As the Brexit deadline gets closer, industry pundits are trying to gauge what may happen in the buy-to-let mortgage market in 2019. Certainly in 2018 there was a noticeable decrease in purchase transactions from landlords with numerous surveys and research showing a reticence among some to pursue expanding their portfolios. This didn’t signify a mass exodus from the buy-to-let property market, but more likely a cautiousness and ‘let’s wait and see’ attitude while watching how the government’s negotiations play out.
However, 2018 did see a healthy buy-to-let remortgage market and a greater proportion of landlords choosing fixed rate mortgages during this period of complex discussions in Brussels. Certainly there is the possibility that Brexit could unsettle the UK economy and the prospect of a rise in interest rates is realistic, leading to more investors looking to fix their monthly mortgage payments.
For this reason, it could be beneficial for landlords to examine their current portfolios this year and make the most of some very attractive deals being offered. There is no shortage of lender and product options as providers of buy-to-let finance still seem very keen for business. There are also plenty of remortgage products that come with incentives such as a free valuation or free legal fees.
The buy-to-let remortgage market could be a profitable place for brokers to focus on this year and keep a close eye on clients whose initial rates are coming to an end.
Following the theme of remortgaging, it may not always be in a client’s best interest to seek a different lender for their refinance options.There have been so many changes over the last couple of years, namely the PRA regulations that came into force in 2017, that have had a significant effect on the underwriting approach from buy-to-let lenders. This has included more stringent rent stress tests and stricter underwriting for portfolio landlords which may limit the options for some professional landlords seeking to refinance.
Despite this, there is a growing number of lenders offering‘switch’ or ‘retention’ products to existing customers with many offering attractive rates and this could be a good source of income for intermediaries. Although procuration fees are normally lower for this type of transaction, the work involved in completing these cases is significantly less.
With the PRA regulations resulting in such significant changes to buy-to-let underwriting there have been more cases of legitimate applicants falling short of the current rental stress tests despite being able to afford monthly payments on their mortgages. For this reason, we have seen more lenders offering a ‘top slicing’ or ‘rental top up’ facility to their buy-to-let propositions to support viable applicants who may have a shortfall of rent for the given rent stress test, but have provable surplus income that verifies their suitability for finance. TBMC has a good selection of lenders on its panel to help with this scenario and is well placed to help intermediaries place tricky cases in the buy-to-let mortgage market.
With the deadline for filing last year’s accounts on 31st January, landlords will now have a clearer idea of how the changes to mortgage interest tax relief are going to affect their profitability. For the tax year 2017-18 landlords can claim 75 per cent of their mortgage tax relief, reducing to 50 per cent in 2018-19, 25 per cent in 2019-20 and ending up at zero from April 2020. Thereafter, landlords will qualify for a 20 per cent tax credit for their mortgage interest payments.
This new system will clearly have a significant financial impact on buy-to-let investors, particularly for professional landlords, and may well push some into a higher income tax bracket as they will have to declare income used to make mortgage payments.
The new system only applies to private landlords – people who own their properties as individuals rather than through a business. For this reason,TBMC is seeing a growing interest in limited company buy-to-let mortgages, with around 25 per cent of all applications being submitted for properties held in a corporate structure. This is true of both experienced portfolio landlords and newcomers to buy-to-let property investment.
However, it’s not a completely straightforward decision to make as incorporating can make taxes more complex. Taxes need to be filed for a business and corporation tax is payable on the profits.
Additionally, if a landlord decides to transfer an existing portfolio to a limited company, they would have to pay stamp duty on each property.Limited company mortgages may also be more expensive than those offered to individuals which could cost more than any tax saving made. Advice from a qualified tax adviser is always recommended for any landlord considering incorporating for the first time.
As landlords consider the impact of taxes on the profitability of their property investments, those who choose to invest in Houses in Multiple Occupation (HMOs), will have some additional concerns to address. The new HMO regulations that came into effect in October 2018 include stipulations about minimum rooms sizes for this type of property. These rules may have implications for existing properties and mean that new purchases require some modification before they can be let out. This may also impact on the availability of mortgage finance for properties that don't meet the required standards.
It is certainly something for landlords to consider, particularly if they are purchasing an HMO at auction when completion is normally required within 28 days. There are solutions though, most notably short-term finance options that can provide the required funds to carry out any necessary refurbishment works or room modifications before remortgaging onto a standard buy-to-let product. TBMC has recently expanded its buy-to-let bridging panel to cater for this type of situation and now has a wide range of different options available.
There was a cooling in the number of mortgage applications for property purchases during 2018, but a healthy remortgage market is still apparent alongside the growing interest in short-term finance options. Needless to say,the buy-to-let sector is ever changing and it can be challenging for brokers and landlords to identify the best product options in the current lending environment. TBMC aims to make the process easier for customers, providing support and solutions using our experience and expertise in this complex sector.
On October 1st 2018 changes to the mandatory licensing of Houses in Multiple Occupation (HMOs) were introduced in England. There is now a revised definition of an HMO under the Housing Act 2004, which means that for licensing purposes, an HMO is any property occupied by five or more people,forming two or more separate households. This contrasts with the previous definition which also included that the property comprised three or more storeys.
The RLA has estimated that an extra 177,000 HMOs will now be subject to the new mandatory licensing in England. Licences issued under the previous definition will still be valid until the expiry date when a new licence will need to be applied for under the new rules. Landlords who find that their existing properties now require a licence should apply through the local council.
Perhaps more significantly is the introduction of minimum bedroom sizes for mandatory or additional HMO licences. The new mandatory licence conditions include notifying the local authority of any rooms with a floor area of less than 4.64 square metres; having a minimum of 6.51 square metres for sleeping accommodation for tenants over 10 years old and a minimum of 4.64 square metres sleeping for persons aged under 10.
Breaches of the rules relating to minimum room sizes could lead to a criminal conviction resulting in a significant fine or civil penalty. However,if a breach occurs the local authorities will allow a reasonable time (up to 18 months) for the problem to be rectified.
These changes will certainly have an impact on the buy-to-let market. It is likely that there will be a considerable number of landlords looking to make modifications to their HMO properties in order to comply with the new room size requirements. This may include reducing the number of rooms in a property, which could have a knock-on effect on the amount of rent that can be charged overall. Having a reduced rental income may affect a landlord’s ability to meet lender rent stress tests when applying for mortgage finance.
It is not clear how the new rules will affect buy-to-let mortgage lending, what approach lenders are taking if they identify HMOs that are in breach of mandatory licensing, and what guidelines are being provided for carrying out valuations on HMOs. As with any significant change it can take time for it to bed in.
From a broker perspective, it makes sense to check that any landlord seeking finance for an HMO is aware of the new rules and has taken the necessary steps to comply. This change to licensing may also provide an opportunity to talk to buy-to-let clients about their plans to undertake any alterations to their HMO properties in order to meet minimum room size requirements. As a result, there could bean increase in demand for short term finance to make alterations or to buy properties that need modifying before remortgaging onto a term loan.
Bridging is becoming a more popular option for short term projects and purchasing properties that are not currently mortgageable. There is a wide range of bridging lenders available in the marketplace with varying rates and different lending criteria to suit a multitude of situations. Due to increased demand, TBMC has recently reviewed the bridging loan market and will be providing an expanded lender panel to help place short term finance cases.
A report from Shawbrook Bank about the buy-to-let mortgage market has analysed in some depth the impact of the 3 percent surcharge on the purchases of second homes, mortgage interest tax relief changes, the introduction of the PRA regulations and tighter underwriting criteria for professional landlords.
The report highlighted the recent decline in buy-to-let purchase transactions but recognised the robust remortgaging market due to current low interest rates. It predicts a further slow down of the market over the next few years which will impact the amount of buy-to-let mortgage business being written by intermediaries.
Despite a sobering outlook for the immediate future, there are still plenty of opportunities for brokers in the buy-to-let market and some lenders are trying to provide more innovative financial solutions.
There was a time when there was a good selection of lenders offering light refurbishment schemes which would enable landlords to carry out necessary works on their properties such as boiler replacements, new kitchens,bathrooms and carpets etc.
However, in recent years most lenders have withdrawn their refurbishment products and until last month TBMC has only had Shawbrook Bank and Saffron Building Society on its panel for this type of offering. This has limited the options for landlords looking to purchase at auction, for example, or purchasing under valuation or choosing to refurbish to maximise the rental yield of their property.
Currently many landlords undertaking this type of investment will secure bridging finance then try to line up a suitable buy-to-let mortgage as an exit route. However, they will often have to wait until the work is completed before lenders will carry out a valuation and offer terms.
Precise Mortgages recently launched a new refurbishment buy-to-let scheme through TBMC, which offers the flexibility of bridging finance up to 75 per cent loan-to-value with the security of a long term buy-to-let mortgage up to 80 per cent loan-to-value once the property has been refurbished.
The guarantee of a competitively priced mortgage as an exit route should be an attractive proposition to landlords who can now approach refurbishment opportunities more confidently and we have already received considerable interest in this new scheme.
With the challenges in the buy-to-let market over the last couple of years, many brokers have turned to bridging finance as a way to supplement their incomes and the sector has been booming. According to the Association of Short Term Lenders annual bridging completions are around 27 per cent higher in 2018 so far compared with last year, which underscores the opportunity here.
The reputation that bridging has had of being punitively expensive seem to be diminishing and if used intelligently it can be an excellent resource for buy-to-let investors, enabling them to make the most of opportunities and bargains in the rental property market.
At TBMC, we have expanded our bridging panel to offer a broad range of options and competitive deals for brokers and their landlord clients. Bridging can provide a healthy additional income stream and is likely to generate follow on business for arranging an exit mortgage from the bridge.
At TBMC, we also receive a good number of enquiries about semi-commercial properties which can offer an excellent investment opportunity and avoid the higher stamp duty applied to second homes. For example, a single freehold that includes a commercial property, such as a shop with living accommodation above it, is not subject to the 3 per cent levy increase imposed in 2016.
TBMC has a few lenders on its buy-to-let panel who have an appetite for semi-commercial finance such as Interbay and Shawbrook, and an extensive list of lenders via our TBMC Commercial proposition, so brokers can welcome these cases as they can be quite straightforward to place.
In conclusion, despite the contraction of the buy-to-let mortgage market, there is still plenty of business to be written and with the right skills and knowledge of product providers, brokers can look forward to profitable endeavours within the investment property sector.
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