Anyone hoping for a soft landing in 2018 is in for a rude awakening. As far as buyto-let mortgages go, we’ve already seen significantly more demand than at this point last year, and with a raft of two-year fixed deals about to reach maturity following the stamp duty rush of 2016 there will be no taking the foot off the gas until at least the end of March.
It’s now almost two years since the government’s 3 per cent stamp duty surcharge hit landlords, a tax reform that caused property transactions to almost double in the month before implementation, and it’s nearly time for those borrowers to re-mortgage. Indeed, the number of buy-to-let mortgages taken out for the purchase of new properties in Q1 of 2016 totalled over 49,000.
That’s 2.5 times the seasonal average, hitting £25.7bn in March 2016 alone. Many borrowers who chose to act ahead of the change did so on a two-year fixed rate term, so with the maturity date now just around the corner brokers can expect a busy couple of months.
When it comes to the sort of mortgages landlords will be gravitating towards, it’s important to remember that the market context is not what it was two years ago. Interest rates have begun to climb, and with the PRA’s new guidelines around affordability, we’re expected to see a greater demand for five-year deals.
As of January 2017, the PRA introduced stricter rules of affordability testing for two-year fixed rate products, meaning that to qualify for a mortgage under the latter terms, borrowers must be able to afford the interest at a percentage greater than the rate offered.
For many landlords, the costs incurred as a result of rising interest rates, as well as a reduction in mortgage tax relief, mean that they may not be able to afford their mortgage under these terms. However, affordability testing does not apply to applications under five-year terms, so it’s easy to see why landlords hoping to borrow more will be looking closely at the differences.
Another factor to consider is that the Bank of England’s Term Funding Scheme comes to an end in February 2018. Introduced in the summer of 2016, the scheme has injected a significant sum of cheap capital into banks by encouraging them to lend. However, the end marks an inevitable increase in the cost of funding for banks, and therefore more expensive buy-to-let mortgages. In this way, costs will remain a key issue for landlords already feeling pressured by the reduction in tax relief and tighter regulation.
On one level, 2018 is going to be a year of waiting and watching, as the impact of new regulation and tax reforms come to bear on the market, but that doesn’t mean it will feel quiet for intermediaries. Now more than ever, brokers will be able to demonstrate value by helping clients find the right mortgage in a more heavily regulated and complex tax landscape.