In response to fears that buy to let mortgages may be used fraudulently by increasing numbers of residential borrowers in order to bypass affordability checks, the Mortgage Works has introduced new ‘plausibility’ checks for buy to let applicants.
In a blog published last week, TMW’s managing director Henry Jordan called for “firm, pragmatic” measures that can prevent the use of buy to let mortgages for fraudulent purposes, whilst avoiding saddling genuine property investors with unnecessary regulation.
Due to residential mortgages being assessed on income in order to determine affordability, many residential borrowers find it difficult to buy certain homes or in certain areas without significant funds for a deposit. An interest-only buy to let mortgage provides a way to circumvent the affordability checks and it is feared that residential borrowers, with other options limited or unavailable, will turn to them in order to be able to fund the purchase of a home.
This concern was raised by the Financial Conduct Authority (formerly the Financial Services Authority) last year, and could prove to be a real problem. Regulation is in place to prevent residential borrowers from taking on unsuitable products and unmanageable debt, and those who commit fraud to do so are putting themselves at great risk. As buy to let mortgages are commercial loans, a property secured with one is easier for lenders to repossess; this is in addition to the greater risk of arrears from servicing larger loans.
TMW’s plausibility check
Mr Jordan deems the £25,000 per annum basic minimum income requirement still used by many lenders as inefficient, as the amount firstly does not relate to the amount being borrowed, and secondly excludes some lower-income borrowers from the market.
As a result, TMW have made a number of changes, including the assessment of first-time landlords against an income benchmark of 425%. If the amount being borrowed is larger than 4.25x the applicant’s income, factors such as their credit profile, property information and the deposit source will be scrutinised more carefully before accepting the application.
"These prudent criteria help to address the risk of an applicant who meets the income requirement but who is planning to reside in the property themselves using BTL, thereby placing themselves at risk of losing their own home or of being unable to repay the debt in the future.
"At the same time our considered approach means that we are able to accept genuine applications from prospective landlords, such as asset rich retirees looking to boost their income but earning less than £25k, who may be declined by other lenders on income alone."
Henry Jordan, Managing Director at TMW
Buy to let regulation
Whilst buy to let mortgages are most frequently not regulated in the same manner as residential mortgages, we follow the guidelines set by the FCA when providing advice to all of our customers. If you would like to purchase a property to let, contact us to see how we can help you find the right buy to let mortgage.