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Landlords could become mortgage prisoners under new underwriting standards


Stricter affordability checks for buy-to-let (BTL) finance could trap some landlords as “mortgage prisoners”, a broker has warned.

Earlier this month, the first wave of the Prudential Regulation Authority’s (PRA) new minimum standards for BTL underwriting came into effect.

Under the new rules, affordability assessments must take into account the borrowers’ costs, while lending to landlords with at least four mortgaged BTL properties must also undergo a specialist underwriting process.

Commenting on these changes, John Phillips, group operations director for Just Mortgages and Spicerhaart, warned that some landlords could become trapped by the tighter standards.

“The new underwriting standards will just make it more difficult again for landlords to get a mortgage,” he explained.

“It will also leave some landlords trapped on the mortgage they have, mortgage prisoners, unable to remortgage away as they cannot meet the new standards.

“If they start to make a loss, this may well force them to sell the property and drive them out of the market.”

Could landlords be trapped on the mortgage they have?

How will landlords be affected?

The new PRA standards come as one of several recent blows to the BTL market, including a 3% rise in stamp duty land tax in April 2016 and the abolition of tax relief for mortgage interest payments by 2021.

In October, the National Landlords Association estimated that some 440,000 landlords who pay the basic rate of tax will be forced on to a higher tax bracket from April 2017 as a result of losing tax relief.

Last week, a survey conducted by Mortgages for Business found that almost two-thirds of landlords expect to be impacted by this raft of changes to the BTL market.

John suggested that this wave of reform could hinder access to BTL finance.

“The new standards will also mean that lenders will become much stricter about who they lend to.

“This … will make buy-to-let a lot less attractive and less accessible, so it is likely that the number of buy-to-let purchases will decline again this year.”

Chris Bramham, director of mortgages and BTL at Brightstar, echoed this sentiment, adding: “We have already seen a situation where mortgages [that] may have fitted with lenders on the old rental calculations … do not fit when you apply the new calculations.”

Although acknowledging that landlords may be worse off under the new rules, David Whittaker, CEO of Mortgages for Business, recognised why the changes had been made.

“If you’re a landlord and you want to remortgage and raise finance personally, the changes have a negative impact because you will not be able to raise as much as previously,” David conceded.

“From the regulator’s position, the checks are a positive move because they mean that personal borrowers are less exposed as the new interest restrictions start to take effect.”

Chris Norris, head of policy at the NLA, proposed that more should be done to raise awareness of the purpose of these changes.

“…Most landlords won’t have any experience of financial regulation and are likely to perceive the changes as having a negative effect.

“In light of this, the Bank of England and lenders could be doing more to publicise the practical impacts in a manner designed to be meaningful to laymen, not just bankers.“

New Bank of England underwriting changes are expected to impact the buy-to-let market

‘We don’t believe the high street can currently cope’

Despite John’s concerns, Harry Landy, sales director of Enterprise Finance, took a more optimistic view of the market.

“We don’t believe the high street can currently cope with this shift, meaning lenders specialising in complex BTL transactions will see significant opportunities in 2017,” he stated.

Indeed, David cited figures from Mortgages for Business which revealed that limited companies were responsible for 69% of BTL applications for purchases made in the fourth quarter of 2016, up from 27% before the tax changes were announced in July 2015.

Chris agreed that limited company BTL could grow in popularity.

“Clearly the changes are more beneficial to limited company BTL, and we are seeing more and more products for [the] longer term at five years plus.”

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