Buying to let is likely to become more difficult in some areas of the UK. Get the latest news and find out how to prepare for future changes.
Yesterday, one of the largest buy-to-let lenders in the UK marketplace tightened its rental cover requirements. The Mortgage Works now requires the rent to cover at least 145% of the mortgage repayments, where once it stipulated 125%.
The Nationwide-owned firm provides one in seven property loans to UK landlords.
The change will make it more difficult for applicants to qualify for loans. Landlords in low-yield regions in particular will need to put down a far larger cash deposit. And when a large mainstream lender makes changes, it is likely that other firms will follow suit.
The market is already moving in this direction
It is now almost a year since the government announced changes to buy-to-let mortgage interest relief that will increase tax costs for a large number of landlords. In advance of the measure’s phased introduction, which begins in April 2017, lenders have adjusted their criteria.
Most have moved towards risk-sensitive models that take into account client circumstances and loan features. The Mortgage Works, for instance, applies a lower stress rate for loans up to 65% loan-to-value and for longer-term fixed rates. This 50 basis point difference to the stress rate allows for around 10% more borrowing.
But investing in some areas could still be more difficult
Returns from buy to let comprise both rental income and capital growth. Some properties are more likely to generate one than the other.
Some areas that see solid price growth tend also to see slower rental growth. This is because tenants’ incomes limit how much they can spend. In London, for instance, the average private tenant spends two thirds of their income on rent.
Investing in area such as London could become more difficult for all but the most cash-rich investors. When you consider that 27% of households in the capital rent privately, it seems likely that this will have a knock-on effect on rental supply.
Will corporate investors plug the gap?
This seems to be the outcome the government is hoping for. Since the days of the coalition, it has spoken of emulating the institutional rental sectors seen in Europe and the US. This would see organisations such as insurance companies, pension funds and real estate investment trusts (REITs) managing significant rental developments.
Yet in 2014, just 1% of the UK’s private rental stock was in institutional hands. In the US, the figure was 13%; in the Netherlands, 37%. The pace of activity in the UK is rising, but will it be enough to meet any shortfall in rental supply?
This question becomes particularly pertinent when one considers some of the measures suggested to encourage institutional investment. One controversial proposal is that local authorities waive affordable housing requirements for rental developments. This introduces challenges in certain markets, where the poorest tenants may not be able to afford the new corporate rents.
The UK needs a combination of social housing, private investment, institutional investment and building for ownership to ensure the availability of housing for everyone who needs it.
Options for the future
The buy-to-let market has undergone countless changes and faced several setbacks over the years. There may be consequences, but in time, landlords will adapt.
The first step is to review your existing portfolio. If affordability requirements continue to tighten, there could be a growing number of buy-to-let mortgage ‘prisoners’ who are unable to refinance their properties.
Increasing equity can help mitigate this problem. Improving your property to increase its value is one way to do this. You can also consider switching to a repayment or part-repayment mortgage or making overpayments. (Though beware of early repayment charges if you go down this route.)
Many landlords are also switching or considering switching to limited company structures to run their property businesses. Limited companies still qualify for full relief on buy-to-let mortgage interest. It could be that limited company applicants do not face as stringent affordability checks as individuals.
Whatever course of action you take, you should have considered all your options and have a full picture of the benefits and risks of each. Be sure to seek appropriate advice from financial professionals.