Buy to let market and lending updates in the UK
This guide is information on buy to let mortgage market and lending updates in the UK.
It covers many areas and how to deal with the changing landscape, what has changed, and whether investing in a buy to let residential property might still be worthwhile.
Contact today to speak with our expert mortgage brokers who deal with buy-to-let property or rental property daily.
The BTL Market: What has changed?
In 2017, there were many changes in the Buy To Let market, which will continue to be challenging for many landlords over the coming months and years.
Although some of these changes are difficult for brokers and investors to handle, such as the buy-to-let tax implications and lending restrictions that may be imposed on them, this could open up new opportunities for those willing to take advantage of them. BTL continues to be a good investment option for long-term returns.
BTL mortgages now account for 20% of total gross mortgage lending, up from 6% in 2008 and 6% in 2008. This growth has seen many lenders offering better rates and more flexible criteria to allow more people to access their products.
This is a great thing for consumers and investors, as they are more likely to be able to get the financing they need. However, lenders may face additional risks if they try to lend to borrowers that would be more niche or specialists.
BTL has attracted investors due to its low-cost financing and the staggering rise in house prices. This has only made it more expensive. The government changed landlords’ tax structure and borrowing options to control house prices.
BTL Tax Changes (2017 and Beyond)
These are the main changes:
- Stamp duty reform Those who buy investment properties or second homes will have to pay an additional 3% stamp tax. A £275k main residence would be subject to £3,750 stamp duty. While a £12,000 second home would cost £12,000, it would still cost £3,750. This is one essential tool the government uses to reduce demand in the rental market. It is the reason why BTL property is less attractive for short-term returns.
- BTL Income tax reform
As it stands now, landlords can deduct mortgage interest and other allowable expenses from rental income before calculating their tax liability. Simply put, if you have £500 rent per month and mortgage interest, management, and maintenance costs of £250 per month, you can declare a profit of £250pm = £3,000 annually.
The tax relief amount is reduced in a gradual approach that runs from 2017/18 to 2020/21. This means that the gross rental income is not subject to deductions. Thus, the £500pm annual income is £6000, regardless of how much is spent on essential expenses.
This will significantly impact BTL investors, especially those in higher income tax brackets who pay a high % tax on their income. It could also render the investment nearly nil.
It is a good idea to speak with your tax advisor/accountant regarding purchasing or moving properties through a Limited Company.
Is there a future for the BTL mortgage industry?
Lenders also believe so. They continue to invest in new products, systems, and marketing while promoting new limited company BTL businesses and competing for them. This opens up more significant opportunities for those willing to trust more specialised lending solutions and step away from high-street banking.
We interviewed many experts in the industry, including leading economists and lenders. The overwhelming majority of them believe that BTL still has a place to be invested.
While some may look for short-term capital growth, others may not be as fortunate. However, the property cannot go either way with an increased housing supply and decreasing demand. Those who stay in the property longer-term could see significant returns, especially considering the low-interest rates currently being paid on saving money.
The serious investor will likely need to look for more creative ways to make money in development projects. This may lead to an increase in the need for specialist finance. Others may also be interested in long-term opportunities such as Cross Rail or HS2.
Others might also consider Houses of Multiple Occupation as a way to increase revenue while still protecting themselves from tax changes. This is possible by working within a limited company and taking advantage of an opportunity that traditional BTL landlords may not have the knowledge or experience to handle.
It’s a challenging future for BTL markets, but it holds promise for those who are intelligent and brave enough to navigate this changing environment.
How to get a mortgage for a buy-to-let property in 2019
The doom and gloom are over. However, there are still lenders willing to lend. They even allow people to take advantage of these changes by expanding their criteria and responding to them. We examine several ways borrowers can secure BTLs despite the new rules. This includes those looking to expand their portfolio or buy a property with low yields.
What amount can you borrow right now?
The affordability assessment is complicated because of many factors. To determine the maximum loan amount, you must meet other affordability and lending criteria. This can be pretty challenging as every lender has different underwriting. We are experts in our field and can help you calculate your financial ability.
The new minimum interest rate is higher.
Lenders require applicants to prove that a BTL mortgage can be afforded. This was historically based on the monthly rental income and mortgage payments.
A few lenders consider BTLs “self-financing” when the rent exceeds 100% of the mortgage payment. However, most require rent to be at least 125% of monthly payments to protect the borrower. This increase was necessary to ensure they had enough cash to cover the property’s maintenance and mortgage payments during void periods.
Lenders relied primarily on the Interest Coverage Ratio or interest rates to determine how much money was available to cover monthly rent. However, they were allowed to adjust their interest ratio’ to enable them to offer higher loans for lower rental values.
The regulator has set a minimum interest rate at 125% as of January 2017. This is based on a nominal interest rate of 5.5%. Many lenders will increase their rates to 145% and even 160% for taxpayers with the highest rates.
A 100k mortgage with an interest rate of 5.5% would mean a monthly payment of £458, which means that the rent must be at a minimum of £573 per month (125%) to be considered affordable. For lenders using 145%, the rent must be £664 per month. This vast difference highlights why finding the right lender is more important than ever!
This will significantly impact low-yielding property owners, especially in London and the South East. Many properties will no longer generate the required rental income for the loan. Investors will either be unable or unwilling to purchase the property with the same amount of finance (and therefore need more cash) or landlords will remain trapped in their mortgages that they cannot refinance.
How to determine how much you can borrow starting Jan 17.
The following is the base calculation to calculate the loan you will get with a specific interest rate/rent: £Loan Required x Interest Rate (%)/12 (months) + Coverage Required (%)
For a £100k mortgage: £100,000.000 x 5.5% = £5500/12 (12 months) =£458.33×125% = £572.91
How your tax band could affect your BTL borrowing
Lenders must show they can manage tax changes by including them in the Prudential Regulation Authority’s (PRA) review. PRA wants to see applicants have enough income to pay their mortgages even if their tax bills are rising.
This is how lenders approach it. They either use blanket calculations that take into account your tax bracket, or they create bespoke calculations for each customer.
Lenders on the High Street are using blanket calculations. They usually look at an interest ratio of 5.5% and coverage of 145%. This means that a £500pm rental will only get a loan of £75,000.
Other lenders have developed specialised calculators that assess applicants’ current and future tax situation (including considering the new BTL) to determine the maximum loan amount. This means that people earning more can borrow less because their higher tax burdens the ability to pay up to 160% for rental coverage. A £500 monthly rent is now sufficient to get a loan of £68,000. These bespoke calculations are as low as 125% and will yield a better result for many applicants, especially compared to the blanket calculations.
Portfolio Landlords: Tougher Underwriting
The final part of PRA’s review will impact BTL mortgages for those who own four or more BTL properties. BTL investors looking to grow their portfolios are now in a difficult spot. The changes in October 2017 are still in their infancy, and lenders are keeping their cards close. Lenders will likely assess the borrower’s entire portfolio and calculate all properties’ total rental income, loan value, and income. This will make it more challenging to apply for loans and less likely that you will be approved.
It is becoming more challenging to find the right BTL loan that you need, but the expert brokers who we work with are experts in the market and will help you navigate the process.
You can borrow more with fixed rates that are longer-term.
You can also look for a fixed rate longer than five years. Because the monthly mortgage payments are spread over a more extended period, they are considered more secure. The PRA has allowed some lenders greater flexibility with their stress rates. They can offer larger loans with a fixed rate of 5 years. While longer-term fixed rates are often more expensive, they could make a difference in whether you get the loan or not.
Specialised Lenders can help you increase your borrowing capacity
Mainstream lenders – Not as simple as they appear
While every lender has its criteria, the central banks and their BTL lending arm have taken a cautious and generalized approach to BTL lending in 2017. In 2017, high street lenders competed for similar businesses. They are all looking for a simple, low-risk borrowers and easy-to-process loans.
High-street lenders turn down many borrowers for this reason. They can either change their plans to meet tighter criteria or speak with an expert to help them get what they want.
Specialist lenders – What are they able to do that other cannot?
Due to the nature and funding of their mortgage books, some lenders may not be bound by PRA changes. They can offer BTL mortgages with lower stress rates and larger loans for the same rental income. To ensure that the application is processed correctly, these lenders only work with BTL brokers with the necessary experience in qualifying, packaging, and presenting these cases accurately. Here are some examples of niche areas that these specialist lenders can finance.
Specialist lender rates can be more attractive than you may think.
Remembering that they might be “specialists” doesn’t necessarily mean they aren’t reliable or well-funded. These lenders are made up of big banks and building societies you might not know, but they are big players in the broker world, lending millions of mortgages every year. You should also remember that they often offer high-street rates to many and, in certain areas, rate-for-risk lending at rates not too far from the mainstream.
Use your earned income to increase your BTL loan.
Lenders may allow borrowers to pay the monthly rent and any rental income with their income. If the borrower has a monthly payment of £200 per month but cannot pay the extra outgoing, the loan may still be approved. Although it is unlikely that the borrower would be able to pay the mortgage, this gives the lender enough security. This is not possible with all lenders. Additional underwriting may be required. Applications can be more complicated to find. This type of underwriting is typically reserved for people with incomes other than property and investment. Professional landlords who rely solely on BTL income are not eligible.
What are the most recent criteria for a mortgage to buy-to-let?
There has been no change in the general criteria for buy-to-let mortgages. Find out how to get one in our buy-to-let mortgage eligibility guide.
Multiple Occupants in a House
HMOs are better known as a way for landlords to make more significant properties by renting out rooms in a communal house to tenants. Each tenant is given their tenancy agreement and usually a lockable area or space in the property. Borrowing is more commercial and specialist than a regular BTL with one tenant. Most mainstream lenders won’t lend their BTL products to such properties.
Limited Company Buy-To–Lets
Although buy-to-let for Limited companies have been around for some time, they have seen a lot of growth in recent months due to investors rearranging their finances to get the best returns. Lenders can lend on lower-yielding properties with greater flexibility because limited company BTLs don’t have to follow PRA guidelines. Clients also get more flexible affordability calculations.
People with bad credit and low incomes can apply for Limited Company BTLs. They are also available to people who want to buy HMOs.
- Special Purpose Vehicles (SPVs).
These Limited Companies are set up to rent or buy properties. They can’t run any other businesses. Lenders don’t require any trading history, as they may have been created to apply for a BTL mortgage. Instead of assessing a non-existent trading history, lenders will look at the directors/shareholders as applicants to decide whether the mortgage should be approved or not. - Trading Limited Companies
Directors of profitable trading companies receive hundreds of inquiries from us. They want to use their retained profits as a deposit to purchase a BTL property. Many brokers don’t know that only a few lenders will grant these companies mortgages, even though the BTL investment is not their primary business. Lenders can assess the creditworthiness of these companies as part of the application. Still, it is also likely that at least 2 of the directors/shareholders are also part of the assessment process.
Changing Personal Property To A Limited Company
Many clients wish to transfer their names into limited companies because of the tax benefits. Although this is possible, it is not a straightforward transaction. Many tax and cost issues are involved, including capital gains and stamp duty. It is essential to consult your tax advisor to determine the best way to hold your property moving forward. For more information, read our 2017 overview.
Many lenders will accept your request to change into a limited company. They can either offer an SPV or trading Ltd companies. The company does not need to deposit to facilitate the transfer. This can be done as a loan to the director.
What’s up with Limited Company BTLs,
While owning BTL property in an Ltd company sounds excellent for managing your portfolio, there are some things you need to keep in mind. First, the company must pay additional accounting fees to file and complete the limited company accounts. The annual return to the companies’ house is also required. Although this is an expense for the business, it should still be considered.
There are fewer lenders, meaning there is less choice in mortgage products. Personal BTL mortgages have a higher rate with less preference, increased risk, and more cost for underwriting. However, prices have dropped as a result of competition. Additional restrictions on lending criteria may include loan sizes, minimum property values, postcodes, property construction and tenant type restrictions.
Can I change my mortgage to buy to rent?
The latest regulations do not restrict the remortgage of your residential property to make it a buy-to-let.
This article on Buying to Let – contains all the information you need.
Is renting a house still legal if there is no buy-to-let mortgage?
This has not changed. Mortgage fraud could include letting tenants rent your entire property without a mortgage.
BTL Mortgages with Adverse Credit
There are now more options for adverse credit mortgages for investors who buy to let property than ever before.
As lending criteria improve and into new areas, more borrowers with poor credit can get finance at lower rates than you might expect. This article has more information on BTL adverse credit.
Contact our team if you need immediate assistance or mortgage advice. We are here to help.