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New Year, New Buy-To-Let Mortgage Regulations
Liquid Expat Mortgages explore the impact of incoming buy to let underwriting rules on borrowers for UK properties.
To prevent and restrict the amount of debt investors are taking on, the PRA is introducing another sensible affordability check. This will ensure we are not mirroring the pre-credit-crunch days when underwriting checks for investors were too lenient.
What are the implications of tougher interest cover ratios and increased underwriting checks for investors and expat BTL lenders? Liquid Expat Mortgages share their expertise…
A focus on overall affordability
The underwriting changes, which include stricter stress analysis and overall affordability tests, will affect any borrowers seeking finance for a new buy-to-let purchase, as well as certain remortgages where capital raising is involved.
Tests must explore Interest Coverage Ratio, personal income, tax liabilities, secured equity and other financial commitments, as well as the possibility of rising interest rates in the future. For the latter, the PRA has set the minimum interest rate stress testing at 5.5% for the five years following the approval of a BTL mortgage.
Lenders looking at rental cover requirements must demonstrate that they are considering all management costs associated with the property, along with the borrower's tax position. There will be an assumption that all borrowers are high rate taxpayers; only the most sophisticated lenders will have the mechanisms to apply lower stress tests for basic rate taxpayers.
With the reduction in mortgage interest relief for high and higher rate taxpayers starting to take effect, the message behind the guidelines is that 125% cover will be insufficient. However, in recent months we've already seen several lenders increase stress tests for personal borrowers to 145%, maintaining them at 125% only for those borrowing via a corporate vehicle (i.e. SPV limited company). The %age rental cover will be a variable that different lenders will have a slightly different interpretation on what to apply.
Increased scrutiny for "portfolio landlords"
In addition to the affordability checks, by September 2017, lenders are being asked to have robust underwriting processes in place for "Portfolio Landlords," defined as someone with just four or more mortgaged properties! Lending policy is driven largely by past arrears cases; it only took a few large portfolios that went down at the crunch to mar the view of lenders and indeed the regulator.
Going forward landlords with large portfolios will be subject to further affordability checks. Lenders will look to stress background portfolios against new rules to ensure landlords are not over-committed;
How will this affect expats and mortgages?
The changes are likely to make securing finance for property investments in Britain more challenging for UK-based buyers, with a lesser of an impact for expats new to the market. What's more, the underwriting rules won't formally affect portfolio landlords until later in 2017.
"Our expat mortgage brokers are optimistic about the financial climate for BTL mortgages in the UK. Many lenders have already tightened their criteria following the tax changes; this simply brings them in line with those used to assess expats' affordability, which have already been in force for years. As such, these new rules will shock UK-based clients more than it will offshore expat borrowers," says Stuart Marshall, Director of Liquid Expat Mortgages.
"We expect to see the majority of our clients secure the finance options they need to invest in UK property. We also have a number of BTL lenders who are willing to take earned income into account, should the rental income fall short of the new Interest Cover Ratio guidelines."
In summary, Liquid Expat Mortgages forecast:
- A continued move towards overseas landlords using limited company structures to purchase investment properties.
- Investors pushed towards five-year fixed rates to maximise borrowing amounts.
- Expats will be looking more closely at BTL lenders who are not authorised by the PRA and can be more flexible on maximum loan figures.
- Expats will be placed on a more even keel with UK-based buyers.
- Expats who are chasing investment yield will continue to seek higher yielding properties
For more information about incoming changes to BTL mortgage lending criteria, contact +44 (0) 161 871 1216 (tel:+44%20161%
Liquid Expat Mortgages