Regulatory changes and tax tinkering have made it tougher for borrowers. Simoney Kyriakou reports on the ways in which brokers have helped their landlord clients.
Since April 2016, there have been many changes to buy-to-let investment. The first blow was a 3 per cent additional levy on stamp duty for additional properties, citing a need to help first-time buyers at the expense of professional landlords.
The former chancellor also set in motion a phased change to mortgage interest tax relief for buy-to-let investors, changes to the affordability calculations and to the underwriting standards.
In January this year, the Prudential Regulation Authority (PRA) brought in rules that meant buy-to-let lenders regulated by the PRA had to implement restrictions on lending criteria.
These changes include stricter affordability tests, such as ensuring the interest cover ratio, including the impact of recent tax changes, and a stress test on interest rate rises.
And, from the end of September this year, lenders now have to implement more stringent underwriting criteria for landlords. As outlined by Charles McDowell, commercial director of mortgages at Aldermore, the latest rules mean: “lenders now apply an additional background portfolio calculation for landlords with four or more mortgaged properties”.
According to Mr McDowell these changes are indicative that “government and regulators have looked to control the size of the market”.
Adapting or affected?
But have these changes affected advisers and clients – and how can they adapt to overcome the effects of such changes?
Hasan Mustafa, co-founder of digital mortgage SaaS platform Eligible, comments: “Landlords are facing headwinds from all directions since the extra 3 per cent stamp duty was introduced by the government.
“More restrictions followed, including more robust affordability assessments which now take into account rental income coverage across the portfolio rather than the property for which financing is being sought.”
He explains that, under the new rules, rental coverage of 145 per cent at 5.5 per cent is used to determine affordability, but if you add the tax relief being capped at 20 per cent, “the whole economics of the BTL business model could come undone”, especially in prime London, where rental yields are generally low.
It may be that yield gain is compressed while tax bills rise, which could be a problem for investors relying on their buy-to-let income.
At the moment it certainly looks as though I’m going to have to spend a lot more time on submitting a BTL application for a portfolio landlord. — Chris Ioannou, IFA
For some, the full effect of these changes is yet to come, according to Liz Syms, chief executive of Connect for Intermediaries.
Ms Syms explains: “The changes to the mortgage interest tax relief have yet to fully impact the market.
“While most landlords are now aware of the changes and considering options such as purchasing new property in the name of a limited company, landlords have yet to feel the full impact of how the tax changes will effect their income.”
Yet Ms Syms does not expect a slump in the market. She thinks most portfolio landlords will adapt to the changes in taxation, and find ways to make buy-to-let work for their needs.
However, for advisers, the additional paperwork may well mean additional time spent on what used to be relatively straightforward applications.
In turn, this may lead to higher fees being passed onto clients. Chris Ioannou, senior independent IFA, says: “Things may start to settle (hopefully) but at the moment it certainly looks as though I’m going to have to spend a lot more time on submitting a BTL application for a portfolio landlord.
“As a one-man-band I’ve tried very hard to avoid charging fees on mortgages but over the last few years I’ve unfortunately been slowly introducing them on some types of business.
“I’m now thinking of introducing a fee for portfolio landlords as well due to all the extra time that’s being required.”
Ms Syms adds: “Regarding the PRA’s changes, most brokers have got used to the new affordability rental calculations brought in at the beginning of the year, but are less familiar with the changes to underwriting standards affecting specifically portfolio landlords.
“These mean brokers will now effectively have to do two rental calculations: one on the subject property, and another to stress test the background portfolio.
Rob Bence, co-founder of investing community The Property Hub does predict a tougher and more time-consuming process in the future.
He explains: “The latest round of PRA changes will see applying for a mortgage as a portfolio landlord becoming much more time consuming. Lenders now require financial information for every property in the landlord’s portfolio when assessing an application.
“Packaging all of this information and then waiting for the lender to sift through it will no doubt add a considerable amount of time to the application process, at least in the short term.
“Also, because lenders will have to do this, and the extra man power it will require, means we have seen some lenders back away from the portfolio landlord market or at least reduce the amount of properties they will accept in each portfolio.”
Yet even above the hurdles of paperwork and a potential contraction in the market, Mr Bence thinks the tax challenge will be the biggest one, once it comes fully into play. He warns: “The changes to landlord tax relief means some landlords will find themselves paying tax on non-existent profits”.
Opportunities for brokers
Despite these challenges, there are great opportunities for advisers when it comes to buy-to-let.
Mr McDowell says: “There is a real opportunity for brokers to become ‘buy-to-let experts’ and to further increase the value they add to their landlord clients.
“We’re already seeing landlords place more reliance on mortgage brokers and IFAs, with indicative figures suggesting as much as 90 per cent of buy-to-let business is coming through the intermediary channel.”
What this means for mortgage brokers, according to Ms Syms, is that some clients migrate to alternative property types such as Homes of Multiple Occupation (HMOs) to increase income, or even commercial property or holiday lets that sit outside of the changes.
The property investment game has become more complex and good advice is a necessity — Rob Bence, The Property Hub
She adds: “Brokers who take time to understand the changes can take advantage of the growing demand from serious property professionals, who may in the past have dealt directly with a lender.
“Getting to understand the variety of lender interpretations to the PRA rules will also put them in a strong position.”
Mr Mustafa agrees those advisers who can navigate the buy-to-let space will be in demand.
He explains: “All these changes to rules, affordability assessments, stress tests and tax changes require mortgage advisers who are fully tuned into how the lenders are changing their requirements and criteria.
“Landlords can’t just talk to any broker for advice. They will be best served by advisers who have expertise in this area to avoid making costly mistakes.”
The lender’s role
Mr Mustafa also anticipates that lenders will re-purpose their underwriting teams to deal with the enhanced underwriting assessments, which means specialist buy-to-let lenders will find this an opportunity to gain market share.
Mr McDowell also says lenders are working to help those intermediaries who are seeking to support their clients through these changes.
He comments: “Lenders are trying to make the application process as simple and as straightforward as possible for portfolio landlords, new affordability calculations and tighter underwriting standards have resulted in a more complex market.”
But he notes this is only an imperative because, as the market has become more complicated, more people are seeking advice.
“Brokers have become even more fundamental to the chain,” he adds.
Mr Bence believes there is a “huge opportunity for mortgage brokers in all of this”, primarily because it has never been more important for landlords to seek sound financial advice before making a purchase or remortgaging.
He believes: “The property investment game has become more complex and good advice is a necessity. I would suggest partnering with a tax specialist or, where possible, hiring one to work in house so that you can offer a holistic service to your clients.”
Mr Ioannou agrees with this point, as it means brokers can “build new relationships with accountants, who may now look at mortgage advisers with greater esteem and want to refer business.”
It seems those intermediaries positioning themselves as experts in this area should be able to gain new and loyal landlord clients.