The lending industry has an impressive record of taking most things in its stride, so buy-to-let will survive the onslaught
The big question for the buy-to-let market is whether the Chancellor intends to squeeze it so hard it starts to implode or whether the tax and regulatory changes being introduced will simply bring about the next phase in the market’s development.
Clearly George Osborne deems the sector a threat to the wider housing market. The changes coming from 2017 will effectively impose a tax on turnover, which is not how UK tax is usually levied. For some higher-rate taxpayers, it could turn profitable businesses into lossmakers.
Further, the PRA plans new underwriting standards for buy-to-let mortgages. The proposed changes are designed to ensure landlords will be able to afford the mortgages for which they apply, including the extra financial burden of the tax changes.
We have seen some early responses. TMW has raised its rental coverage calculation to 145 per cent, while reducing its maximum LTV to 75 per cent. It will be interesting to see if this move triggers similar changes from others, and whether it leaves a gap for new and specialist lenders.
With such announcements one after the other, there is a risk of concluding the end is nigh. But that would be wrong. I do not think these developments will have the profound impact some suggest, and the buy-to-let market should stay in good health for some time.
Several lenders have already changed their affordability models. Whether 145 per cent rental cover and 75 per cent LTV will become the new norm for mainstream buy-to-let lenders, only time will tell. But I suspect some specialist lenders will tweak their strategies to exploit potential opportunities.
Some will bring in different rental stress tests for limited companies and individuals as the tax changes have less impact on the former than on higher-rate taxpayers. In fact, this is already happening.
And the PRA’s proposed new underwriting standards will not apply to remortgages where there is no extra borrowing. With around 60 per cent of all buy-to-let transactions being remortgages, there should be no reason for some landlords to become mortgage prisoners as a result of the proposed changes.
I suspect also that lenders that do not impose a limit on the number of properties that can be mortgaged with other lenders will be quicker to respond to the opportunities.
Smaller and newer lenders may also be more fleet of foot in making the systems upgrades needed to accommodate product and criteria changes.
The buy-to-let market faces challenges in getting the balance right as it responds to the enforced changes but the lending industry has an impressive record of taking most things in its stride.
So there is an argument that buy-to-let will face a period of adjustment but, in the longer term, continue upwards. The sector is going through an interesting phase but is not in danger of extinction.
Doug Hall is director at 3mc