How do you think planned rate rises will affect the buoyancy of the BTL market?
Generally, I don’t believe a rate rise in isolation will have a significant effect on the buoyancy of the market.
What will have an impact, however, is the tax changes announced in the last budget, the more recent changes increasing stamp duty by 3% for the purchase of second homes and the potential for regulation in the BTL sector. For example, we may see over the next 12 months changes to lenders’ rental calculations to ensure the sector can cope with both increases in interest rates and tax changes levied on the landlord.
BTL affordability is assessed by most lenders using an interest coverage ratio, which means the gross rental income a landlord receives each month should exceed their monthly mortgage costs by a specific percentage. Earlier this year Accord increased its rental requirement to 125% of 5.24% and we regularly review whether this calculation is fit for purpose.
The majority of BTL mortgages are interest-only, this means rent needs to completely cover the mortgage interest, plus a 25% buffer. If lenders start to increase either their nominal rate used in their calculation or the percentage cover required some landlords may not have sufficient rental income to obtain a BTL mortgage, and this could in turn drive up rents.
How serious an impact, if any, do you think the new consumer BTL rules will have on the market for lenders? What about for brokers?
The European Mortgage Credit Directive means that all lenders, regardless of whether they will offer consumer buy-to-let, will be required to make changes to their documents, including application forms and wording on their illustration and offer documents.
Building societies and banks offering buy-to-let mortgages will need to make it clear to intermediaries what is classed as a consumer buy-to-let and their criteria in this area.
Brokers may feel a significant impact as the new rules mean an increase to their workloads. For instance, a broker will have to be completely satisfied a client is either a consumer or commercial landlord, and incorporate this into their fact-finding process.
One cause of concern for brokers is that some of the rules are open to lender interpretation on the definition, which means intermediaries may experience minor variations on criteria from one lender to another on what constitutes a consumer buy–to-let.
This could cause confusion and frustration for both the broker and their client. Therefore, it is important for lenders to provide clarity and support to brokers dealing with these kinds of cases. At Accord, we will strive to ensure our lending criteria is clear, consistent and easily available through all channels, including on our website.
Do you think these changes are a positive step for buy to let?
The changes are positive, and will afford consumers greater levels of protection across the EU economic zone.
Estimations on the size of the consumer buy-to-let market vary, but it is generally believed to be a relatively small percentage. It’s good for consumers that these accidental landlords will receive additional protection.
What area is the ‘one to watch’ in terms of BTL?
There are a number of areas to watch:
a) Whether there will be regulation in the buy-to-let market, in particular around lender rental affordability calculations
b) The effect of the tax relief changes and stamp duty changes, particularly the potential impact on the buy-to-let market’s growth and how the market adjusts to ensure a market remains for the smaller landlord.
c) Potential introduction of rental caps which again could impact the buoyancy of the sector.
We shouldn’t under estimate the impact these areas could have on the investors.
If you weren’t in financial services, what would you be doing?
I always wanted my own wine bar. It would be a great opportunity for me to provide excellent customer experience, and go the extra mile to deliver service not to be forgotten – depending on how much the customers have drunk of course!
