Brokers are key to ensuring the waves of regulatory change hitting the buy-to-let market do not turn thousands of landlords into ‘mortgage prisoners’, experts say.
They believe the combination of radical tax changes and tough new lending rules could have a damaging effect on the sector, resulting in many landlords being unable to get a mortgage.
In April last year, landlords were hit with a 3 per cent stamp duty surcharge on second properties. This means landlords need to find an extra £6,500 in tax on the average £220,000 property.
Soon after, the Prudential Regulation Authority forced lenders to conduct tougher stress tests on landlords, making sure anyone taking out a fixed rate of under five years could withstand at least a 2 per cent rise in rates.
Then, in April this year, the Government began gradually reducing the amount of tax relief landlords could claim against their mortgage interest.
Within three years, higher-rate relief on mortgage interest will be abolished entirely.
In the latest blow to the market, from the start of this month lenders will be forced to conduct much tougher checks on landlords with four or more properties.
The rules mean lenders will have to start assessing a landlord’s entire portfolio before agreeing to lend on a new property or even a remortgage.
This includes asking landlords to produce a business plan and disclosing how much they owe on other properties in their portfolio.
Landlords fear they will be locked out of the market unless they find much larger deposits or increase rents as a result of the changes.
The cut to interest-rate tax relief already means some are starting to feel the pinch, with lower profits reducing the amount they can borrow unless they raise rents.
The portfolio landlord changes will make it tougher for landlords to get finance if their portfolios are highly geared or if they cannot raise rents.
National Landlords Association representative Richard Blanco, who is also a landlord himself, says the new portfolio landlord rules, as well as the other recent changes, will create a band of landlord mortgage prisoners who struggle to get new loans.
He adds: “Landlords are gradually waking up to the fact that they are having to borrow at a much lower loan-to-value, so they may not get further advances because rental coverage has to be much higher.”
Worryingly, a significant number of landlords seems to be unaware of the recent tax changes or the latest crackdown on the buy-to-let market.
According to research by Nationwide, 32 per cent of landlords were unaware the Government had hiked stamp-duty rates, while 36 per cent had no idea that interest rate tax relief had been reduced.
Some 16 per cent were unaware of any of the recent measures forced upon the sector.
Given the various changes to hit the market, Foundation Homeloans director of marketing Jeff Knight believes brokers have never been more important to landlords.
He says: “Earlier this year, we undertook some research among landlords and it was clear how vital intermediaries are for landlords, especially in today’s market. Landlords were not as au fait with the changes as people thought. What they sought was guidance and they all spoke highly of their intermediaries, who they rely on for advice.
“So in today’s changing market, which is actually yielding more opportunities for intermediaries, the key is to build on the relationships with landlord clients.”
Buy-to-let experts believe the portfolio landlord rules, in particular, could be very damaging to the market.
Some experts have said the changes could cause a “log-jam” as lenders get used to underwriting portfolio landlords in much more detail.
However, others believe the new rules could have a much greater impact on the market. At the recent Financial Services Expo in London, Mortgages for Business chief executive David Whittaker said the changes will be a “car crash”.
He added: “Landlords don’t know about [the changes] and they’re going to say to advisers, ‘I don’t like what you’re asking me to supply and I’ll go somewhere else.’”
Not only do the rules throw up major challenges for brokers with regard to explaining the changes to their clients, but also as far as getting to grips with lenders’ criteria is concerned.
Lenders have interpreted rules in very different ways, forcing brokers to get to grips with often very different criteria.
For example, BM Solutions and Skipton Building Society have slapped minimum income requirements on portfolio landlords.
Coventry Building Society, meanwhile, is refusing to lend to landlords with less than two years’ experience, while others have introduced tougher rental income ratios on borrowers with four or more mortgaged properties.
More than ever before, landlords will have to bear in mind how their other loans will affect their ability to get new finance.
Accord Mortgages, for example, is one of the lenders that is applying average rental coverage ratios to a landlord’s portfolio. It has set its minimum coverage ratio at 135 per cent.
In theory, it means landlords with three properties collecting enough rent to cover 125 per cent of their mortgage payments will need to collect enough to cover 165 per cent on the fourth to bring up the average.
Several lenders showed their hands close to the deadline to apply the changes, meaning brokers have precious little time to familiarise themselves with their criteria.
But while the new rules throw up more complexity, experts believe they provide brokers with a huge opportunity to show their worth by helping landlords navigate the myriad of criteria.
Shawbrook Bank deputy chief executive Stephen Johnson believes the new rules could actually benefit brokers.
Speaking to Mortgage Strategy, he says: “Undoubtedly, things will get more complicated and more difficult for landlords with four or more properties. But I think landlords will seek out specialist brokers who know the sector very well. If anything, I think it could lead to a more professional, specialist buy-to-let sector.”
Vida Homeloans director of sales Louisa Sedgwick also believes the new rules will throw up opportunities for brokers.
She says: “Advisers will of course need more information from their customers but this should actually give you the opportunity to offer them more products and services. The greater complexity that has come does mean greater opportunity for advisers.”
So how, then, can brokers ensure their clients are not trapped by the complex web of tax changes and increased underwriting requirements?
Knight says client contact is vital.
He says: “The most effective way of enhancing relationships is with communication. Intermediaries are vital for landlords and therefore the more they reach out and inform their clients about the changes, the more business they will write. As such, communication will build landlord confidence, which has been waning in recent months.”
Connect Mortgages chief executive Liz Syms believes it is vital brokers stay on top of lenders’ new portfolio landlord criteria as lenders come out with radically different approaches to underwriting these borrowers.
Speaking at the FSE, Syms said: “Lenders are interpreting the PRA underwriting rules differently. For instance, the four mortgageable property rule to be defined as a portfolio landlord.
“Not every lender is interpreting this rule in the same way; some are including properties with no mortgage and advisers have to be mindful of this.”
Mortgage clubs such as Paradigm and Legal & General have useful guides detailing the various approaches taken by lenders.
While brokers should make their clients aware of the various changes, they have been warned to tread carefully.
Johnson urges brokers to avoid attempting to explain the wider tax ramifications to their clients.
He says: “Brokers need to be careful not to stray into giving tax advice, I think they should be signposting them to their clients and advising them to seek out a specialist who can help them work out how the tax changes affect them.”
This feature was first published in a Buy-to-Let supplement produced with Aldermore and Foundation Home Loans