Landlords set to face tougher lending criteria

harvey bowes mortgage broker cardiffThe Chancellor recently confirmed that the FPC are to have new powers over Buy To Let mortgage lending. This move is designed to control lending in order to take the ‘heat’ out of the market if necessary. How might this work? To answer that, we can take a look at the limits placed within the residential and regulated market. There is not just FCA regulation to monitor the practices of the industry, but also set parameters to temper the market. Two of these which have powerful effect is controlling the overall income multiple – limiting how much one can borrow based on an overall multiple of what they earn by way of proved income. Another is the restriction of higher loan to value mortgages.

How would this translate into the BTL market and what effect would that have on lending?

Firstly, the FPC may cap Loan to Values (LTV’s). Typically most BTL lenders offer mortgage products with a maximum LTV of 75%. However, there is a growing number of lenders offering 80% and there is also 85% available. Restricting the LTV could take some heat out of the market as Landlords would need greater cash reserves to place as deposits and buy, fuelling the market.

Another limit would be placed on stress testing. Currently many lenders stress the mortgage payment against the rental income. With the rental income needing to exceed the payment by a specific amount as a minimum. For example, the rental income must be 125% of the monthly mortgage payment – not at its current level, but often at a nominal rate of 5.5% or similar. Perhaps the FPC, in the interest of ensuring property investors have built in sufficient margin for future increases, could demand the lenders raise the nominal 5.5% to 7% or more. Again, this would potentially restrict the borrowing an investor could leverage against a property and therefore require more of their own funds in the deal.

Again, there is potential to stress the overall mortgage borrowing of a portfolio Landlord. There was a time post credit crunch where Natwest applied an overall stress test to an investors income of 8x. In other words, if your mortgage borrowing across any residential and BTL mortgages exceeded 8 times your proved non-property derived income, they would refuse to lend further funds. And to be clear, non-property derived income meant that the rental coming in against those properties could not be included in the assessment. The return of this type of policy would again result in restrictions that would take the heat out of the market.

What can be done for investors who want to continue ‘momentum investing’?

We will have to wait and see exactly what restrictions are placed in the market by the FPC. However, any restrictions are likely to effect the Commercial Lenders and their ability to advance mortgages to property investor less. Therefore, investors looking at buying larger properties, such as blocks of flats, HMO properties and commercial premises are likely to not face the same restrictions as the standard BTL lenders will impose.

It may also mean more Landlords buying property with a via a Limited Company or other legal structure. And with the new tax implications, also announced by the Chancellor in the recent budget, buying investment property through a Limited Company is certainly a proposition worth looking at. It is also more likely that lenders will also move this way. With more BTL lenders offering mortgages to SPV Limited Companies. SPV being Special Purpose Vehicle. It is important to many lenders that the Limited Company is for the sole purpose of holding property and does not have other trading activity.

To find out more about your options, contact a member of the Harvey Bowes team today on 029 2175 4150. You can also find out more about the options available to Landlords by attending one of the 50+ Property Investor Network meetings across the UK. If you want to book onto any ‘pin’ meeting throughout the UK for the first time, then use our voucher code “BOWES” when you book for free entry courtesy of the pin network. Go to www.pinmeeting.co.uk to find your local meeting, and don’t forget to use the voucher code.

The author of this post, Howard Bowes is the Host of the Cardiff pin meeting. You can find out more about Cardiff pin at www.cardiffpin.co.uk

Go to Harvey Bowes main website here: www.harveybowes.com

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About harveybowes
Mortgage Broker and founding Director of Harvey Bowes Limited. A mortgage broking practice with bases in Cardiff & Poole, UK. We take a fresh and positive approach to mortgage broking which pays dividends for both our clients and frankly, ourselves. The team at Harvey Bowes are expert advisors in all aspects of mortgages from residential to commercial and buy to let.

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