Flicking through the pages in the press, you might be forgiven for thinking that over the past 12 months it has been Armageddon in the buy-to-let market.
Yet as those in the sector reflect on the host of regulatory and tax changes that have taken place, many are finding that the doomsday prophecies have not been fulfilled.
January 2017 marked the first wave of the Bank of England’s Prudential Regulation Authority’s BTL changes. This included the introduction of a minimum interest cover ratio threshold of 125 per cent. Lenders are required to calculate this against a minimum borrower interest rate of 5.5 per cent for at least the first five years of the mortgage.
The second part of the proposals came into effect in September 2017 and focused on portfolio landlords. Under the new guidelines, lenders have to complete a total portfolio assessment for any landlord with four or more mortgaged BTL properties.
Lenders now need to consider a landlord’s experience and the performance of their past portfolio and liabilities, as well as any future business plans and projections before lending on any new mortgages.
So how is the market holding up under the weight of the latest regulations?
Alexander Hall associate director Greg Cunnington thinks the sector is still relatively strong. “There is a clear weakening in the BTL purchase market that we have seen since the initial PRA changes,“ he says. “However, lending levels have remained consistent for the past 12 months.”
He adds: “BTL remortgage application numbers are now accounting for the majority of our BTL business and lenders’ criteria enhancements, particularly around like-for-like remortgages, have been a real positive for the market.”
Figures from UK Finance show 5,300 new BTL house purchase mortgages completed in December 2017, 17.2 per cent less than in the same month a year earlier. In comparison, there were 9,900 new BTL remortgages completed in December, 11.6 per cent less than in December 2016.
Recent research from the Intermediary Mortgage Lenders Association paints a gloomy picture. It claims net investment in BTL property has fallen by 80 per cent from £25bn in 2015 to just £5bn in 2017.
We are seeing as much BTL business as ever
Liz Syms, the chief executive of Connect for Intermediaries, says the industry needs to be careful at being too guided by statistics. “Both IMLA’s figures and those of UK Finance only reflect the findings of their members,” she says. “There are a growing number of niche lenders in the BTL market that are not a part of these organisations.”
She believes that lenders who cater for the larger professional landlords are not showing the same dire statistics. “We are seeing as much BTL business as ever, but predominantly from professional landlords with multiple properties,” she adds. The latest round of guidelines had the biggest impact on residential landlords who have just a small number of properties, says Syms.
JLM Mortgage Services director Rory Joseph agrees and says the changes have been the final nail in the coffin for the casual investor and possibly dissuaded many accidental investors. He adds: “Those with a well-formulated and long-term business plan have continued to invest. After all, with fewer buyers there is a greater opportunity.”
He feels the market has shown its resilience and the British public are still passionate about investing in bricks and mortar. “Yes, LTVs have been hit, particularly in London and the South-east, prompting a regional shift north, but rumours of the death of BTL have been greatly exaggerated,” he says.
In reality, one of the ways the market has been affected is in the knock-on effect on lenders’ service levels.
One growing initiative, post the PRA changes, has been the increasing number of lenders using ‘top-slicing’. This is where lenders use personal income as a means to supplement the rent within the affordability test.
Cunnington says some lenders’ BTL propositions are in a very good place. “The majority of high LTV BTL that we now do is on a top-slicing basis due to the low yields of London property. A lot of these clients have strong incomes as they are the ‘accidental landlords’ of the past ten years.”
He adds: “We are also seeing other lenders introduce top slicing to supplement a shortfall in the rental income requirement assessment, which is a real positive.”
Joseph feels the growth in top-slicing solutions has been slower than expected and the increasingly complex variations with differing calculations has been confusing.
“The new entrants have been responsible for most of the innovation,” he says.
Some lenders did not have the time they needed to perfect their proposition
Since the new rules, Mortgages for Business chief executive David Whittaker says one or two lenders have followed a principle of supporting the non-portfolio landlords. “It’s still the greater part of their back books, so why wouldn’t they and it’s healthy for the market,” he says.
He believes bigger problems have arisen from lenders trying to run both channels at once. “It’s questionable whether their ordinary proposition is being dragged backwards because their underwriters are dealing with the 20-25 per cent of landlords who require more insight,” he says. The relatively short timescale in which lenders had to implement the rules perhaps meant that some lenders did not have the time they needed to perfect their proposition.
Syms feels lenders responded significantly differently to the portfolio landlord rules. “While some of the big BTL lenders scaled right back and introduced a limit of a maximum of 10 properties in the background portfolio, others saw it as an opportunity and went out of their way to make it easier for brokers and receive the portfolio information in any way the landlord or broker can supply it,” she says.
“Initially, lenders had to launch their proposition fairly blind with limited guidance from the PRA. As their criteria has settled and they have observed what other lenders have done and how their business volumes have flowed since launch, some are now tweaking their criteria to make their offering more flexible and competitive.”
Calm before the storm
The market appears to be relatively stable, so is there any concern that it is the calm before the storm? Whittaker says the tax rules will not start to bite until next year and the years after.
“For most, the realisation will come in January next year when they press the submit button on their tax return and it’s not the figure they expected. “One or two will start asking questions of themselves and looking at their properties and those that aren’t paying their way,” he says.
Whittaker says the caveat from the PRA that allows lenders to offer a product transfer using the old stress tests will help prevent mortgage prisoners but he warns that such caveats have not yet been fully put to the test.
He says: “What I’ve yet to see is if lenders will allow a product transfer in ignorance of the background portfolio. I don’t think there is enough evidence to say how well the market is dealing with it or not, as the case may be.”
Whittaker would also like lenders to disclose their product transfer numbers as this part of the market increases. “Back in 2016, 3.6 per cent of our business was product transfers, last year it was 5.2 per cent and this year it’s going to be 8 or 9 per cent – when it gets to those sorts of figures you need to know about it,” he says.
Need for advice
The BTL market may be in a stable position but there still appears to be a great deal of uncertainty. The one benefit to brokers is that investors will be turning to them for advice.
Syms says: “As a result of the changes, the role for a good BTL broker is growing as the rules become more complicated. Landlords are finding it harder to navigate the rules themselves and pull everything together that they need to and so this is where a good broker becomes invaluable – particularly for landlords with large portfolios who need and want the broker to pull together the necessary spreadsheets and cashflow forecasts on their behalf.”
She says investors have been frustrated as a result of the additional documentation requirements and the additional length of time the whole process is taking.
“Many landlords who have not transacted a mortgage since the changes are still confused about what it means to them. Many who have not used advisers before are now turning to them to get help to navigate through the wide differences in lenders’ criteria and requirements.”
Key BTL changes
July 2015 – Chancellor George Osborne announces a cap on the amount landlords can claim in mortgage interest tax relief. In his Summer Budget he reveals that from April 2017 it will gradually be reduced to a maximum of 20% by 2020. Limited companies are exempt from the changes.
November 2015 – Osborne delivers an additional blow to landlords in his Autumn Statement, revealing a 3 per cent hike in Stamp Duty for second homeowners from April 2016.
Feb 2016 – Landlords’ confidence in the BTL sector collapses to an all-time low, worse than levels witnessed during the financial crash, according to the National Landlords Association.
March 2016 – The Bank of England’s Prudential Regulation Authority unveils its plans for an affordability stress test and new underwriting rules for portfolio landlords. The new rules will start to take effect from September 2017.
April 2016 – Landlords are no longer automatically able to deduct 10% as a tax break for wear and tear but can only deduct actual expenses from profits.
January 2017 – The PRA’s first wave of affordability measures take effect, including a minimum interest cover ratio threshold of 125 per cent for landlords, alongside a borrower interest rate of 5.5 per cent for at least the first five years of the mortgage.
September 2017 – Lenders bring in stricter underwriting processes for portfolio landlords.
January 2018 – Research from the NLA shows 20% of its members plan to reduce the number of properties in their portfolio in the next year – the highest level of intended property sales in 10 years.