Both choice and change are afoot in the market this week. Just when it looked like buy to let activity was quietening down, we are expecting a fresh surge of interest in the sector as landlords hurry to complete on their mortgages while the opportunity is still there.
What exactly has changed? Lenders across the country will shortly be phasing in new underwriting rules for buy to let mortgages in response to a Bank of England announcement last month. Going forward, landlords will be subject to stricter affordability checks, bringing buy to let borrowing more in line with residential mortgages. Stress testing to ensure the viability of the mortgage in the event of a 2% rate rise will be compulsory. The income coverage ratio (ICR), a test ensuring the borrower’s income is sufficiently higher than their monthly outgoings, will take the higher tax rates applicable from 2017 into account, as well as all other costs for which the landlord is responsible. Under the new tax regime, landlords will no longer be able to deduct the cost of their mortgage interest before calculating their tax bill.
On top of this, any landlord with four or more properties will have to undergo a more detailed, specialist underwriting process. Currently, more than half the private rental properties in London are in the hands of landlords with portfolios of this size.
What does all this mean? The ultimate result, once the new rules are in place, will be a reduction in the total amount buy to let landlords can borrow. In the short term, it will spark a significant increase in buy to let activity as landlords look to capitalise on the current favourable market conditions while they still can. Buy to let rates remain low as the market adjusts to the recent stamp duty hike and, at Enness, we are expecting a large spike in business over the next few months.
‘The current lending environment is by and large hospitable for buy to let borrowers, with rates at historic lows,’ says Islay Robinson, CEO of Enness Private Clients. ‘But it won’t last forever. Waiting until after the implementation of the new lending rules may leave you unable to secure a large enough loan.’
As with most major changes, lenders are reacting ahead of time, and the new rules are already starting to come into play – which is why it is so important for landlords to be aware of how and why the landscape is changing. Last week Nationwide Building Society introduced some restrictions on buy to let lending, and will henceforth require landlords to receive far more rental income relative to their mortgage costs than was previously the case. Its ICR has increased from 125% to 145%. Other lenders are expected to follow suit in a domino effect.
The message is simple: if you are looking for a high value buy to let mortgage, don’t wait.
If you’d like to discuss your buy to let options, please do get in touch. Our specialist advisers are on hand to help day and night.