David Whittaker explains how he is pleased to see that the majority of buy to let lenders have adjusted their affordability calculations, but brokers need to be ready for these changes to affect the shape of the buy to let mortgage market.
It was always accepted by the buy to let market at large that 125% at 5% was a responsible stress test. With the changes to landlords’ income tax imminent, it is therefore inconceivable that any lender could now consider the historic formula ‘responsible lending’. So, with the exception of one or two outliers, I am pleased to see that the majority of buy to let lenders have now adjusted their affordability calculations.
I make no apology for banging on about these stricter underwriting standards or the pending changes to income tax relief for landlords which predicated the PRA’s new guidelines. If you’ll excuse the split infinitive, they are going to seriously affect the shape of the buy to let mortgage market this year and for years to come.
And brokers need to be ready. I’ve been out and about recently at a myriad of broker events trying to spread the word and I have been amazed at how few brokers are prepared for the changes that are already happening.
As a specialist BTL broker, we have witnessed a fast shift by landlords towards incorporation, particularly for new buy to let purchases but increasingly too, for ‘transfers’ from personal to limited company ownership (which are in fact purchases not remortgages).
In my experience, unfortunately, this shift is not yet being replicated as quickly by landlords who use smaller brokerages, particularly sole-trader brokers. Last year, when I started talking about this subject, a quick hands-in-the-air straw poll at broker events showed that around 10% of brokers had handled a limited company buy to let case.
This year I have been on the road again attending broker events up and down the country. The same straw polls appear to show that around 15% of brokers have worked on limited company BTL cases. Whilst that is definitely a move in the right direction, I doubt it’s fast enough and I am concerned that somewhere down the line, there might be some unpleasant repercussions. Think PPI scandal… yes, I’m deadly serious!
Advising 'Portfolio Landlords'
Many brokers I have spoken to this year also seem unsure of what will be expected of them when advising ‘portfolio landlords’, i.e. landlords with four or more mortgaged properties who will be subject to specialist underwriting procedures from 1st October 2017.
So, if you are a broker who is in need of more information on the all the changes and their impact on the buy to let market, here are a few pointers:
Read as much as you can, in particular:
- PRA Supervisory Statement SS13/16: Underwriting standards for buy to let mortgage contracts is a pretty dry document but it does get to the nub of the matter and it’s better to hear it from the horse’s mouth.
- HM Customs & Revenue clarification including: Changes to tax relief for residential landlords and How it’s worked out, including case studies.
- Keep abreast of any related fiscal and regulatory developments. Mortgage Strategy (other trade publications are available) has been very vocal on the subject and you’ll find lots of blogs and related articles on our website too - I've put some useful links below (again, there are plenty of other market commentators out there).
- Take the time to understand the various BTL lenders’ criteria particularly regarding lending to limited companies and portfolio landlords. A starting point here would be to concentrate on the specialist lenders which already have the procedures in place to handle these deals. In this regard think Aldermore Bank, Axis Bank, Foundation Home Loans, InterBay Commercial, Kent Reliance, Keystone Property Finance, Paragon Mortgages, Precise Mortgages and Shawbrook Bank. If you don’t have direct access, align yourself to a broker that does, i.e. Mortgages for Business! (Other partners available…). Remember, criteria are likely to change as the lenders develop new policies and processes to comply with the new guidelines, so review regularly.
- Start learning about limited company structures. Gov.uk has lots of useful information especially how to Set up a private limited company.
Talk to other brokers:
- There are lots of forums and groups online – join the discussions.
- If you are part of a network, ask about training and guidance.
- Attend industry events, especially the seminar programmes, there are lots out there up and down the country, the big ones being Financial Services Expo, Mortgage Business Expo and Commercial Finance Expo.
Talk to your clients:
- Share your knowledge with them.
- Ask each and every one of your clients to take professional advice on how the tax changes affect their portfolio. We insist that clients borrowing in a personal capacity sign a form declaring that they have either taken advice or understand how the tax changes will affect their portfolio and borrowing decisions.
- Encourage your portfolio landlord clients to prepare for 1st October by filing their tax returns; compiling a comprehensive spreadsheet of their entire portfolio including mortgage details and rental income; and keeping an up to date schedule of their income and expenditure.
Yes, it’s a massive task but one to avoid at your peril. You have been warned!
An abridged version of this article was published in Mortgage Strategy on 9th February 2017.
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