Yesterday’s release of the Prudential Regulation Authority’s (PRA) report on ‘underwriting standards’ for the BTL market has confirmed that there are yet further issues ahead for existing landlords with B2L mortgages.
The key issue is that the new ‘Interest Cover Ratio’ (ICR) to be imposed now has a deadline for the end of the year, which means that most lenders will start to implement it ahead of that (many already have).
Basically this means that lenders will have to apply a harsher ‘affordability’ criteria. For some time now the traditional ‘loan to value’ criteria has been over-ridden by a lenders need to ensure that rental income adequately covers debt servicing with a margin (typically rent to be 125% of loan repayments). This will go up to 145% and the ‘stress test’ interest rate used will also be standardised (and increased to 5.5%).
Six things for existing landlords with B2L mortgages to consider here:
- Deals are still available at lower debt servicing ratios – but time is running out – so anyone on the verge of investing should look to exploit a narrowing window.
- Landlords should review the expiry of their current loans, including the maturity of initial offer rates. It may still be worth switching lenders ahead of maturity to avoid problems of refinancing or rescheduling loans coming to an end early next year.
- Fixed rate deals are dealt with more favourably under the new underwriting rules, as they are not subject to the same stress test (which is designed to ensure a landlord can meet loan repayments in the event of interest rates rising).
- Those landlords with four or more properties will be defined as a ‘portfolio landlord’ under the new rules and be subject to a more specialist underwriting assessment. That is likely to cause some changes for lenders and it is not clear what their approach will be.
- Those landlords operating as Limited Companies will be less harshly treated (as they will be able to gear more highly)
- Investors might be inclined to look at higher yielding types of property or geographical areas, until such time as capital values catch up and push up prices.
The above is likely to prompt more investors to explore operating as a Limited Company, despite the initial costs associated with that. On this issue we encourage clients to check carefully with their accountants or tax advisers as to the merits and downsides of operating in this way.