Last week, the Prudent Regulation Authority (PRA) announced its final decisions regarding the underwriting of buy-to-let (BTL) mortgages. The changes come as another blow to landlords that are already feeling the pinch of this year’s stamp duty and taxation changes.
So what exactly do you and your clients need to know about the updated Underwriting Standards for the BTL market? These are our top 5 points to take away from the PRA report.
It’s a little more stressful…
While currently, most lenders stress BTL affordability using the rental income and looking for coverage at around 125% of 5%, the new rules surrounding affordability are a lot stricter. An interest base rate of 5.5% will be the new normal – completely unrelated to the bank of England base rate.
Affordability is changing…
The way that the affordability of a BTL product is calculated will be changing.
As well as the standard stress test, lenders can look at personal income to see if the mortgage payments can be made.
Lenders are no longer allowed to take into consideration the equity in the property when calculating affordability, nor any future rise in property prices.
Looking at portfolios…
Under the new guidelines, a borrower with 4 or more mortgaged properties is classed as a portfolio landlord.
While that may sound like a pretty watertight definition, it’s up to firms to determine how to verify the number of mortgaged BTL properties that the landlord has. Clients may be asked to show their experience in the BTL market, as well their current portfolio and mortgages.
There are exemptions…
Underwriting standards aren’t changing for everything. Holiday lets and bridging loans are all exempt from the new underwriting standards as they are not looked after by the PRA.
The changes are happening quickly…
Despite protests from certain lenders, the PRA changes are happening sooner, rather than later.
The first phase of the stress test integration comes into effect at the start of the year (January 1st 2017), to be completed by September 30th of the same year.
This leaves clients that are looking to begin their journey into property management, or expand their current empire, in a tricky position – act now or be priced out of an already competitive market.
Jo Breeden, Managing Director of Crystal Specialist Finance, said: “For anyone with clients looking to get involved in the BTL market or grow the income that those properties can bring in, the next 3 months are key. Clients should look at securing funding now, to make the most of the competitive products that are in the marketplace, before the cost of a BTL property becomes prohibitive. While the appetite for rental properties is increasing, both due to lifestyle and circumstance, the PRA changes have the potential to cause a lull in the volume of BTL applications – perhaps not now, but in the long-term."
Do you think the PRA changes will change the amount of BTL cases you’ll see? Let us know in the comments section below!