Changes to buy to let RTI calculations on 2016 meant many landlords have been unable to remortgage. But there’s good news for buy to let mortgage prisoners; find out why you might not be as trapped as you think.
What is a mortgage prisoner?
A mortgage prisoner is someone unable to secure a new mortgage deal. Reasons for this can be due to personal circumstances (e.g. significant drop in income, bad credit rating) or a change in mortgage lender policies which mean you no longer fit the criteria.
Buy to let mortgage prisoners
In 2016, the Prudential Regulatory Authority (PRA) implemented changes to the way lenders should assess affordability for buy to let mortgages. The PRA introduced a new calculation to determine affordability; the Rent to Interest (RTI) calculations. The change was to ensure rental income could cover the mortgage and the mortgage interest, helping prevent landlords from taking on too much debt that their properties rental income could not cover, and to protect lenders from mortgage arrears.
For personal name borrowing, the RTI is 145% at 5.50%. For limited companies, it’s 125% at 5.5%.
It meant that many rental properties would no longer meet affordability calculations, essentially becoming un-mortgageable for many landlords.
Why are the PRA changes relevant now?
After the announcement of the changes, there was a short grace period before they came into force. During this time, a swathe of landlords remortgaged to take advantage of the more generous calculations. As a significant number of these were five-year fixes, these rates are now ending and up for renewal.
The worry for these landlords is that they will not be able to remortgage and will have to roll onto lender standard variable rates (SVR), which is often a lot more expensive!
The good news is, RTIs have moved on in the last five years.
What RTI calculations are buy to let lenders using now?
The RTI calculations used for buy to let mortgages now vary from lender to lender. As a general rule, those taking a five-year fixed rate in their personal name can expect a 145% payrate up to 5.50%. However, if you’re a basic rate taxpayer, you may access a 125% payrate up to 5.50%. For those borrowing via a limited company, then expect a 125% payrate up to 5.50%. HMOs and multi-unit properties can attract different calculations, but again, this depends on the lender.
How does this benefit buy to let landlords?
For many landlords who, five years ago, wouldn’t have been able to get a mortgage under the new calculations, there is more choice! In addition, interest rates are in a great place right now, so you should be able to get a more competitive rate or even capital raise.
To get a clear understanding of your options, get in touch with our team. We’ll be able to look at the whole buy to let mortgage market and assess what can work for you; even if your ERC period doesn’t end for another few months, it’s good to shop around and find out what’s on offer. As I said, rates are competitive at the moment, and you can often set up your next mortgage up to six months before your current one runs out, so there’s no time like the present!