Bricks and mortar have always been seen as a sound investment. While the property market may be subject to price fluctuations in the short-term, over a longer period it has always been regarded as a profitable investment. When buy-to-let mortgages became available to the market in 1997, the average price of a house in the UK in Q4 of 1997 was £61,830. Looking 20 years ahead in Q4 of 2017, the average house price in the UK has risen to £211,433 which equates to a growth of over 300%. As property prices boomed, casual property investors became landlords with multiple property ownership.
Multiple Property Owners
It is estimated that around one in thirty adults is now the owners of multiple properties. However with many first-time buyers struggling to get on the property ladder the Government, through the Prudential Regulation Authority (PRA), has introduced new rules for those looking to buy properties for this reason. The new rules – effective from 30th September 2017 – are not intended to prevent or harm the buy-to-let market, but rather to make it fairer for all concerned. There may, however, be unintended consequences to the tightening of buy-to-let mortgage rules.
New mortgage rules
Many of the changes only affect a landlord with four or more properties, who are considered to be ‘portfolio investors’ under the new rules being put in place by the PRA. The major change means that lenders will now assess a portfolio as a whole when calculating total income, rather than as individual properties in isolation, as was the case before the changes. Coupled with this, the lender will assess the potential impact of any new borrowing that the investor may want to take on. The idea is to ensure that any new borrowing does not adversely affect the overall affordability of other properties already owned, in light of the tax changes coming into effect.
This will fundamentally mean more work for lenders who will now have to carry out further checks on the portfolio owned by the potential lender and determine whether it will become too much of a burden. They will assess this by carrying out an Interest Coverage Ratio (ICR) over the whole portfolio and determine any weaknesses. Additionally, the lender will also take into account the landlord’s individual earned income/salary and assess the landlord’s income tax position to establish what impact the income from a new property will have on the additional mortgage.
What this means for landlords
Landlords who already own four properties in their portfolio, or currently own three and are looking to buy at least a fourth, are likely to find that they are more limited in the choice of lender, as not all mainstream buy-to-let lenders are offering mortgages to portfolio landlords. This means that more specialist lenders or “tier 2” lenders will need to be considered to allow for required loan-to-values to be achieved. New rental stress tests used for portfolio landlords will be applied across the entire existing portfolio. Due to stringent bank underwriting processes, the lender turnaround times are slower as they are having to consider many aspects of the applicant’s position.
It’s not all doom and gloom for the BTL market
As a landlord, if you were to assess the return you are getting on your buy-to-let investment (return on investment), these are still very much at the higher end of returns compared to cash, bonds, gilts, shares etc. The main fundamental reason for this is that you can leverage against the value of the property by obtaining a mortgage.
Even though deposits required for a buy-to-let purchase may have risen since the changes, there are ways to ensure you can maximise borrowing by considering purchasing a special purpose vehicle. There has been a massive rise in the number of limited company mortgages available, with more and more lenders entering the market. This has created competition amongst lenders in offering limited company buy-to-let rates, thereby bringing down rates and fees which are being charged.
Hiten Ganatra, Managing Director of Visionary Finance said, “We see the current state of the buy-to-let market as a huge opportunity for landlords to grow their portfolio strategically. With mortgage interest rates the lowest they have been in their history and credit balances paying nominal interest, we believe bricks and mortar still gives a very good return on investment and can serve as a nest egg. Ensuring that you strategically structure your portfolio by purchasing good quality housing stock and getting the right financial advice will be the key to growing your portfolio in a subdued market”