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Being able to accurately source buy-to-let mortgages is one of the challenges of successfully placing cases for landlord clients. The marketplace for buy-to-let finance has always been very dynamic with daily changes occurring to lending criteria and product options. It requires skill and resourcefulness for intermediaries to determine the best solutions for each scenario presented to them.
Some ‘vanilla’ cases are straightforward with few criteria issues to resolve, so finding suitable mortgage products quite often comes down to the cheapest rate currently available and the preference of the client for the rate type and term.
Things get trickier when presented with a more complex case where a more in-depth knowledge of lending criteria is required to identify the best providers. Experience counts for a lot with buy-to-let mortgages and being familiar with which lenders do what can save huge amounts of time when first assessing an enquiry.
Learning shortcuts is a key element of successful sourcing, especially when dealing with specialist lenders and more complicated scenarios. For example, at TBMC we get a lot of enquiries for HMO properties so establishing the number of bedrooms and whether a licence has been obtained can quickly eliminate certain lenders and give a more manageable shortlist of lenders to consider.
Likewise, with expat cases; finding out which countries a lender will accept and establishing the applicant’s income are always key facts as they can rule out many providers at the outset, saving time and effort.
TBMC has had a surge in holiday let enquiries since the coronavirus pandemic due to the rise in popularity of UK staycations. Again, asking pertinent questions at the start can really speed up the process such as where is the property located, what is the rental income during high and low seasons, are there any restrictive covenants?
Of course, most brokers have a range of tools at their disposal including sourcing systems, criteria databases and a range of different calculators to help them find solutions, although the reliability of information can sometimes be a concern. The dynamic nature of the buy-to-let mortgage market means that the providers of product data are constantly having to update their systems to present an accurate picture of what is currently available.
At TBMC we use our own bespoke buy-to-let mortgage sourcing system and criteria database, so we know how reliable our own data is and have a team dedicated to keeping it updated daily.
With any sourcing system, having an intelligent way of narrowing down your search according to specific client requirements can be a huge time-saver.
TBMC’s Sourcing and Quotation system has numerous filters such as for HMOs, limited companies, expats, age, tax status and portfolio size which can help to quickly identify suitable providers. However, we do not rely solely on the system when dealing with complex cases and place a lot of value in maintaining relationships with the many supportive Business Development Managers (BDMs) in the buy-to-let sector. BDMs can be an excellent resource and sounding board for checking whether a case is likely to be accepted by a lender and it is good practice to make use of their knowledge.
Although sourcing buy-to-let mortgages can be challenging, it makes the work varied and interesting as no two cases are exactly the same. It certainly keeps us on our toes!
There are encouraging signs in the buy-to-let market that it is making a recovery since the housing marketing opened up at the beginning of May with the return to visual inspections in England. Since then we have seen a flurry of activity from lenders as they reassess their buy-to-let mortgage propositions in response to greater demand and competition. This has resulted in more products being offered, better rates, higher LTVs,increased maximum loan sizes and many other criteria tweaks that reflect the growing confidence among both lenders and landlords.
There are other factors that have come about as a result of Covid-19 that may also help the buy-to-let sector to rebound and provide a boost to mortgage business for intermediaries. The temporary change to stamp duty on properties valued up to £500,000 was predicted to create a surge in buy-to-let purchase applications and there is evidence that this has started to happen since the measure was announced in July.
At our business, since the end of July, the percentage of enquiries about mortgages for buy-to-let purchases has risen to around 72 percent compared with just below 50 per cent during the month of June. This is a significant change and indicates a renewed level of purchase activity from landlords. A recent poll carried out by Cherry, a mortgage adviser forum, showed that over half of brokers had experienced increased buy-to-let business with nearly 30 per cent reporting an increase in individual purchases and 27 percent reporting an increase in limited company purchases.
There is clearly a pent-up demand from landlords who may see now as the perfect time to expand their portfolios and take advantage of good opportunities with more properties available on the market and vendors eager to make a deal. The pandemic situation has also curbed people’s spending and provided an opportunity to save over the last 5-6 months, savings which could now be used as deposits for new property investments. With savings rates so low – around 40 per cent of easy access accounts are earning 0.1 percent or less - investing in property may be an even more attractive option; Halifax reported an average rise in property values of 1.6% in the month of July.
As the coronavirus remains in the UK and as the economy tries to recover, the number of income and job losses has been staggering and the damaging effect on many people’s livelihoods is hard to witness. It is difficult to predict how the next 6 months will unfold and what new job opportunities will develop for those looking for work. It may result in people becoming more mobile and perhaps relocating to new areas to gain employment. This could increase demand for rental accommodation from new tenants including those who don’t want to commit to purchasing property in a different area.
Covid-19 has had a dramatic effect on UK workplaces with an increasing number of staff working from home. This trend may become the new norm as businesses recognise the potential benefits of home working. This may also impact on the type of properties that tenants require – perhaps seeking extra rooms to accommodate a home office.
What is clear is that as we recover from the impact of the pandemic, tenant demand for rental property remains strong and that landlords are keen to grow their property businesses.
Chancellor Rishi Sunak unveiled a range of packages to help the economy in his Summer Statement in July, with particular support for the housing market. Two elements will be of particular interest to landlords – a Stamp Duty Land Tax reduction and new Green Homes Grants for home improvements.
Let’s look at the implications of both.
Stamp Duty Land Tax
The Chancellor announced that he was raising the Stamp Duty threshold on residential property transactions from £125,000 to £500,000. This will run from 8 July 2020 to 31 March 2021 and means that home buyers purchasing a property up to £500,000 will pay no Stamp Duty.
For buy-to-let landlords, the 3% surcharge introduced in April 2016 remains, so whilst they will see their Stamp Duty bills reduced, it’s not as good news for homebuyers.
Before, landlords would pay 3% SDLT up to £125,000 of the property’s value, 5% between £125,000 and 8% between £250,000 and £925,000. Between now and 31 March next year, landlords will pay a flat 3% of the transaction value up to the £500,000 threshold.
Our analysis shows that this will typically benefit those landlords in Southern regions more as property prices are higher in those regions, particularly London and the South East.
Prior to the Chancellor’s Stamp Duty announcement on July 8, a landlord buying a property in the North West at Paragon’s 2019 average property price of £170,191 would pay £6,009 in Stamp Duty. A landlord in London buying a property at the average price of £578,167 would pay £36,253.
Following the Chancellor’s Stamp Duty holiday, the North West landlord’s Stamp Duty cost reduces to £5,105, with the London landlord’s tax bill falling by £15,000.
Hamptons International has calculated that the average SDLT bill paid by buy-to-let investors across England will fall from £7,120 to £2,400, a reduction of 66%.
Green Homes Grants
The Chancellor also unveiled a scheme to help homeowners and landlords improve the energy efficiency of their homes and support the UK to become carbon neutral by 2050.
The Government will introduce a £2 billion Green Homes Grant, providing at least £2 for every £1 homeowners and landlords spend to make their homes more energy efficient, up to £5,000 per household.
For those on the lowest incomes, the scheme will fully fund energy efficiency measures of up to £10,000 per household. In total, ministers say this could support over 100,000 green jobs and help strengthen a supply chain that will be vital for meeting our target of net zero greenhouse gas emissions by 2050. The scheme aims to upgrade over 600,000 homes across England, saving households hundreds of pounds per year on their energy bills.
The Green Homes Grant will cover a variety of energy saving home improvements. Whilst a comprehensive list has not been released just yet, some of the confirmed improvements are wall and roof insulation and double glazing.
Although full details have yet to be released by the Treasury, applications are expected to be open from September.
A month is a long time in the buy-to-let mortgage market, which has always been a dynamic sector that continually changes in line with social, political and economic factors. The big news for landlords in July was the announcement of the stamp duty cut in England for properties valued up to £500,000.
This measure introduced by the government to help stimulate the housing market was also extended to buy-to-let properties, which could really encourage landlords to start actively seeking to expand their portfolios again. Although the 3 per cent surcharge for second homes is still applicable, buy-to-let investors would previously have paid 5 per cent stamp duty for properties up to £500,000, so there are big savings to be made while this incentive is in place.
As the government seeks ways to kick-start the housing market, it is also providing Green Home Grants to homeowners to help them make their homes more energy efficient. Once the scheme is launched in September, vouchers of up to £5000 can be applied for to help cover the cost of insulation and double glazing.
While businesses around the UK start to open up again, lenders are also returning to a more ‘business as usual’ approach to buy-to-let finance. There has been a flurry of activity over the last month, with lenders re-evaluating their lending policies and re-pricing their product ranges as competition increases in the marketplace. This is creating a downward pressure on mortgage rates, resulting in better deals for landlord clients.
Lenders are returning to more specialist areas of lending such as for HMOs and limited company applications with a wider range of products now available. Lenders such as Leeds and Hampshire Trust Bank are also offering products for holidays lets again, which presumably follows on from the opening up of these businesses around the UK. Some lenders may hold off returning to this niche sector while there is still the possibility of a Covid-19 second wave, but with the growing popularity of staycations in the UK, the market for holiday lets looks promising.
In support of landlords during the coronavirus pandemic, some lenders will take account of furloughed income when assessing the affordability of buy-to-let mortgage applicants. However, lenders may not take such a lenient view of applicants who have applied for abuy-to-let mortgage holiday during the crisis as this could be interpreted as demonstrating underlying cash flow issues with management of the property.
Overall, the buy-to-let mortgage sector is continuing to recover, so intermediaries can expect to experience an increase in enquiries from their landlord clients, particularly for purchases following the stamp duty cut. Although face-to-face meetings with clients may still be off the table, some brokers have used the coronavirus experience to transform their use of technology to do business. This may include holding client meetings via Zoom or improving their online presence.
With the buy-to-let mortgage market still in a state of flux it is important to stay on top of all the lender criteria and product changes to ensure that landlord clients are getting the most suitable products. TBMC aims to support brokers by providing our specialist expertise and up-to-date criteria knowledge to provide solutions to even the trickiest buy-to-let cases.
The UK housing market has opened up since the end of May, with visual inspections resuming albeit more quickly in England. This means that buy-to-let mortage lenders are also returning to a more normal approach to business. However, the recovery of the market will take time.
Positive improvements in the marketplace have seen many lenders launching new product ranges, offering higher loan-to-values (LTVs) particularly in the 75 per cent LTV bracket, providing more options for landlords. However, there is still a lack of competition in the 80 per cent LTV bracket which could create difficulties for landlords who are more highly leveraged when looking to remortgage.
Now that physical valuations can be carried out, some lenders have returned to more complex lending such as on HMOs, multi-unit blocks and limited company applications. Foundation Home Loans recently launched a selection of packager exclusives for standard and large HMOs which are available through selected partners including ourselves. However, it was disappointing to see Barclays withdraw from both multi-unit and limited company lending.
There are also competitively priced buy-to-let mortgages available for standard properties from high street lenders and some excellent product transfer rates for existing customers, including a 1 per cent 1-year fixed rate currently being offered by TMW.
It is likely that the marketplace will continue to develop in the coming weeks as more lenders respond to the new normal and we may see more options in niche areas of lending such as for holiday let properties.
There has been a fair amount of concern about the impact of coronavirus on the ability of tenants to pay rent during the crisis and the effect this could have on landlords. Given the government ban on starting the eviction process before the end of August, some pundits predicted that there could be a surge in eviction applications post-Covid-19. However, a poll commissioned by the RNLA questioned over 2000 tenants and 90 per cent had been paying their rent as usual, which suggests that a concern over a spike in evictions could be unfounded. 84 per cent had not needed any support from their landlord, and of those that did three quarters received a positive outcome.
Even though this report paints a good picture,there are some landlords having trouble collecting rent for their properties who have applied for a mortgage holiday with their buy-to-let lender. This may provide a short-term solution, but how will it affect a landlord’s ability to access finance post-coronavirus?
Although applying for a mortgage holiday will not affect a customer’s credit file, lenders may reasonably ask why it was needed.As they assess the risk of lending to an applicant, lenders will want reassurance that there aren’t any existing financial issues with the property, portfolio or business in question. This may make it more complicated for those who have taken a mortgage holiday when they seek further finance, but it remains to be seen how this will play out.
As the UK housing market gains momentum, landlords may be looking for their next opportunity to expand their portfolio and considering the most cost-effective way of doing this. There have been questions around whether landlords who run their property business via a limited company could use the government-backed Bounce Back Loan Scheme to fund further property purchases.
Small businesses can apply for up to £50,000 with no interest to pay for the first 12 months, after which the interest rate is 2.5 per cent. This could seem like a relatively cheap way to raise a deposit;however, lenders do not normally accept loans as a source of deposit and using the BBLS to profit from further property purchases is not the intention of the scheme.
Overall, the buy-to-let mortage market is making a steady recovery and this is likely to continue in the coming weeks and months, providing more options for landlord clients.
Over the last couple of months there have been many conversations around the onus on students to pay rent for university accommodation during the coronavirus lockdown when they have returned home to live with their parents and are no longer using the property and facilities provided. It is a legitimate issue and most people can empathise with students facing this dilemma.
For students in university owned accommodation, many have had their rent and related fees suspended whilst the university is closed, however the scenario is more complex for those living in private rented property.
Tenants in privately owned accommodation are still required to pay their rent in accordance with the contract they have with the landlord. Some tenants were under the impression that because landlords were entitled to apply for a 3-month mortgage holiday on their buy-to-let properties, that they wouldn’t have to pay rent. This is not the case and tenants are still required to fulfill their obligations where they can.
A lot of landlords have been demonstrating support towards their tenants during this period and have been keen to find solutions that work for both parties. Although it is right to support the concerns of those who are no longer living in their student digs or struggling to pay rent due to the impact of Covid-19, it is important to also remember that most landlords depend on their rental incomes to support their own livelihoods.
The National Residential Landlord Association (NRLA) has recently conducted a survey of 4500 landlords which shows how tenants facing financial difficulties are being “supported by landlords willing to take a temporary financial hit.”
In the survey, 44 per cent of landlords have been asked for help by their tenants and 90 per cent of those asked had been able to provide it. The type of help been offered included rent deferrals, rent reductions, rent-free periods, early release from tenancies and refunds on HMO service charges.
The survey also shows that 54 per cent of landlords were experiencing issues with tenants paying rents or unexpected voids. Of those dealing with tenants falling into arrears, 60 per cent had lost at least a month’s rent.
This data clearly demonstrates the impact that the crisis is having on landlords and that they are doing what they can to support their tenants during this unprecedented period.
There may be further concerns for landlords who rent to students, especially those who normally provide HMO accommodation to serve the sector. Cambridge University recently announced that it would be running all its lectures online for the next academic year and other further education institutions are likely to consider similar approaches to delivering their courses.
The result of having lectures delivered online and maintaining social distancing measures will impact on the whole university experience that students normally enjoy, so the further education sector is likely to report a reduction in student admissions during the 2020/2021 academic year particularly from international candidates.
This gives rise to the question of how the demand for student accommodation will be impacted if fewer students are required to live near campus to attend lectures. It also leads to questions about whether landlords will move away from the student sector to focus on single family lets or professionals sharing properties, leaving a shortage in supply for those who do seek student accommodation.
It is difficult to predict with so many unknowns, but for those landlords already experiencing rental voids due to Covid-19 repercussions it is certainly something to contemplate, especially for those who own student HMOs. In a lot of cases, it may be financially untenable to convert HMOs back to a single family let as it is likely to devalue the property considerably. However, there is a growing trend for professional sharers opting to reduce their rent expenditure by living with others, especially at the start of their careers. Some HMO landlords may simply shift their focus onto this area of the rental market.
It is important that landlords feel confident to remain in the buy-to-let sector as we ease out of lockdown and start to recover from the impact of coronavirus. If too many decide to leave, it will only further fuel the housing crisis leaving more tenants chasing fewer properties.
The opening up of the UK housing market, including the lettings market, has been welcomed by landlords as the lockdown measures are easing and visual inspections are resuming. The government has published guidelines on how to undertake the various stages in the letting process such as viewings, safety inspections and tenancy check-ins. This should kick start the buy-to-let sector and there may be some good opportunities for landlords to expand their portfolios, especially if some sellers are keen to move quickly.
The buy-to-let mortgage market, unsurprisingly, has experienced significant turbulence since the beginning of the coronavirus lockdown which has meant that the profile of lenders and products available to landlords has changed.
To begin with some lenders have withdrawn from the market, a number of these (typically non-banks) should be temporary as they wait for funding lines to become available, but there may also be long term casualties who are unable to return to buy-to-let lending post-crisis.
The overall number of buy-to-let mortgage products has dropped markedly, with Moneyfacts reporting that 1304 products had been taken off during March with changes continuing throughout April and into May. It was reported that 5-year fixed rates took the biggest hit, followed by 2-year fixed rates.
Some lenders have also responded to the crisis by reducing their maximum loan-to-values, resulting in a significant dent to the 80 per cent LTV market and the removal of 85 per cent options. This may cause challenges for buy-to-let clients with more highly leveraged properties when they are looking to remortgage and deter those without high deposits from making purchases.
We have also seen lenders modifying their lending criteria, especially in the complex buy-to-let sector, which may allow the remaining specialist lenders offering, for example, finance for HMOs, limited companies and multi-unit blocks, to take a large slice of the pie.
Interest rates have increased on several ranges which will be disappointing to landlords, especially as the mortgage interest tax relief scheme for buy-to-let properties was finally phased out in April, creating additional costs to many rental property businesses. However, there are still competitive rates to be found.
The fact that the country is in lockdown has meant that visual property inspections are no longer possible and for this reason some lenders have suspended offering new purchase finance. However, there are a growing number of providers who have switched to using desktop valuations or AVMs during this unprecedented time, to allow business to continue.
The government has advised against house moves during the crisis period which has slowed the housing market and impacted on buy-to-let purchase transactions. However, it does mean that there is likely to be a pent-up demand for buy-to-let finance once lockdown measures are lifted and movement in the market is resumed.
This is obviously a challenging time for everyone in the buy-to-let sector, but also a time when landlord clients can benefit from the support of a buy-to-let mortgage expert. Being able to answer questions about the availability of finance or other relevant issues, such as buy-to-let mortgage holidays(available for both personal name and limited company mortgages), may be invaluable to landlords during these unprecedented times.
Many landlords could save themselves money by remortgaging, so it is also worth reviewing the whole property portfolio during this period. There may be options to release some equity which could help ease the pressure on buy-to-let businesses in the current circumstances.
At our business, we are paying particular attention to remortgage business as many of our clients have mortgages coming to the end of their initial rates during the next couple of months. There are still plenty of options to choose from and solutions to be found for most scenarios, which is where having buy-to-let expertise comes to the fore.
As everyone in the UK is adjusting to the societal changes being imposed on citizens due to COVID-19, landlords will also be considering the financial impact on their buy-to-let businesses. The Government has announced emergency legislation providing protection for renters meaning landlords cannot start eviction proceedings for at least a three-month period during the national crisis. These measures are designed to protect tenants who are struggling to pay their rent and prevent people from becoming homeless during this unsettling time.
There is also protection for landlords whereby lenders may offer a three-month mortgage holiday for landlords whose tenants are experiencing financial difficulties as a result of the coronavirus. The measure will be welcomed by landlord organisations such as the NLA and RLA who have asked the Government to be supportive of landlords. However, there doesn’t appear to be any specific help for landlords who don’t have mortgages but may also suffer financially during this period.
The NLA and RLA also issued a joint statement encouraging landlords to be supportive towards their tenants: “Landlords should be as flexible as they can to help tenants facing payment difficulties resulting from the impact of the coronavirus.”
The coronavirus crisis coincides with the final removal of mortgage interest tax relief for landlords which has been phased out in stages since 2016. This has impacted higher rate taxpayers most of all and may push previous basic rate tax payers into the 40 per cent banding. No doubt all landlords are concerned about the financial consequences of coronavirus over the coming months.
Section 21 and removal of ASTs
Since last year, UK landlords have been campaigning against the abolition of Section 21 which currently allows landlords to apply through the courts for a no-fault eviction should they wish to take possession of their property for any reason. Section 21 is still expected to be scrapped although the exact timeline is unclear, but it will leave landlords only able to end a tenancy where they can prove they have legitimate grounds under Section 8 of the Housing Act. A Section 8 claim involves a formal court hearing and the median time for this process to complete is 16 weeks, so landlords are asking for legal proceedings through the courts to become more efficient.
In tandem with abolishing section 21, the Government is also planning to remove the Assured Shorthold Tenancy (AST) which would mean that assured tenancies are the only type of tenancy available to landlords. At buy-to-let finance meetings with landlord groups around the UK that we have attended, landlords have been asking how the removal of ASTs will impact buy-to-let lending criteria? So far there has been little indication from lenders as to how they will react to this change in the rental sector, but it would be good to have an idea.
Although the various changes in the buy-to-let sector over the last 5 years have resulted in some landlords selling up, there has been little sign of larger portfolio landlords looking to exit the market in significant numbers. A recent survey by Moore, the accountants, shows that the number of landlords with a portfolio of 10 or more properties has remained constant over the last couple of years at around 43,000. This seems to show the underlying strength of the PRS in the UK and indicates that many buy-to-let investors look at it as a long-term prospect.
Larger professional landlords may be better able to adapt to changing circumstances with a more diverse portfolio and look at other options for higher yielding properties, such a HMOs or multi-unit blocks. They may also look at geographic regions further afield to take advantage of better performing areas of rental accommodation.
Certainly, at our business we are experiencing a continuing demand for more specialist mortgage products that are aimed at complex property scenarios and professional landlords with expanding portfolios. The experienced buy-to-let investors we talk to are often surprised that more lenders don’t provide mortgages to larger portfolio landlords as they perceive themselves to be a better risk than someone with 3 or less properties and are often irked if they have to pay higher rates.
It is difficult to look too far ahead as we are all currently experiencing unprecedented events and it is unclear how long emergency measures will be in place in UK. However, it is also an opportunity for showing solidarity and support for each other, including the landlord community.
There has been a swathe of tax and regulatory changes impacting on the buy-to-let sector in recent years which may have affected the perception of residential rental property and its viability as an investment option. Consequently, the sector has seen a reduction in the number of amateur landlords and it is now primarily the domain of professional property investors. However, there are still people entering the market and looking to make their first buy-to-let purchases – a group referred to as ‘first time landlords’.
Most lenders on our panel will accept applications from first time landlords providing they are currently an owner occupier, so there are plenty of product options in the marketplace. There is often a requirement that applicants have owned their residential home for a minimum length of time which may vary from 6 to 12 months, although some lenders do not state a minimum period providing the applicant’s name is on the title deeds.
It is not quite as straightforward for first time buyers - those with no existing UK property at all. We currently have around fifteen lenders on panel who will consider applicants without a history of property ownership such as Barclays, Landbay, Precise and Vida Homeloans. Some lenders will apply an affordability calculation alongside their normal rental stress tests and criteria, which depending on income multiples may limit the amount applicants can borrow.
There are also options for first time buyers to be the second applicant on a buy-to-let mortgage and it is a familiar scenario when parents help their children onto the property ladder in this way. Lenders who consider this include Interbay, Leeds Building Society and Paragon.
In recent years, we have seen a significant increase in the number of limited company applications, especially since the phasing out of mortgage interest tax relief for buy-to-let properties. We have also seen first time landlords setting up an SPV for their initial property purchases, which is definitely an option worth considering as it may provide financial benefits depending on individual circumstances. It is always recommended to seek professional tax advice before deciding about this option.
It is simple and inexpensive to set up an SPV, but it is important to register the company with an appropriate SIC code relating to the letting and management of property. Most lenders will accept brand new SPVs with no accounts history, but they will require personal guarantees from the directors/shareholders. There are also lenders that accept companies that trade in non-property related businesses, although the product options for this scenario are fewer.
A significant advantage of using a corporate entity when applying for a buy-to-let mortgage is that they are not affected by the recent tax relief changes or the 2017 PRA regulations relating to rent stress tests. Lenders normally apply a less stringent rental calculation for limited companies, typically at around 125 per cent at 5.5 per cent which may increase maximum borrowing levels for new landlords.
Those investing in buy-to-let property should give proper consideration to property type, tenant demand, location and rental income. These variables can have a significant effect on the overall profitability of an investment and prospective landlords will surely benefit from thorough research. For example, we get frequent enquiries about HMOs and multi-unit properties which often give a better than average rental yield due to multiple rents being charged.
Unfortunately for first time landlords most of the specialist lenders who finance HMOs and multi-unit properties require a minimum amount of previous experience as a landlord. For example, Vida Homeloans requires 12 months’ experience and Paragon Mortgages requires 3 years. However, there are a few options such as Masthaven, Kent Reliance and Together who will consider this scenario for first time landlords.
To conclude, there are plenty of investment opportunities for first time landlords and a wide range of buy-to-let mortgage products to choose from. By considering the different factors that may affect the level of finance available and overall returns on a property, new landlords can make more informed choices during their first buy-to-let investment experience.
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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