As the old saying goes, hope for the best, prepare for the worst. This seems as good a description as any for the Bank of England’s approach to managing interest rates and the prospect of their going up. While savers may be delighted at the idea of earning a better return on their deposits, rate rises are bad news for borrowers and this last fact has clearly been noted by financial regulators.
From the Mortgage Market Review to the Prudential Regulation Authority
Since the end of April 2014, lenders in the residential mortgage market have been obligated to operate according to the principles set out in the Mortgage Market Review. With the benefit of hindsight, it was arguably only ever a matter of time before regulators took a similar approach to overseeing the buy-to-let mortgage market. Both sets of guidance take into account the possibility of future interest-rate rises.
The key points of the PRA’s requirements
More stringent checks on affordability
This is pretty much analogous to the requirements of the Mortgage Market Review. First of all, lenders are obligated to verify personal income and secondly they are mandated to look at the bigger picture including tax liabilities and the possibility of higher interest rates.
Greater demands on rental income
Landlords must be able to show that the rental income on the property in question will cover the mortgage payments by at least 145% even if interest rates reach 5.5%, unless the mortgage offers a fixed interest rate for more than five years.
An obligation to assess a portfolio of four or more properties in full
In keeping with the concept of lenders looking at the bigger picture in detail rather than just focusing on headline figures, where landlords own four or more properties, lenders will be required to look at the performance of the portfolio as a whole rather than just looking at the figures for the property on which they are being asked to lend money.
Sticking points with the new rules
Possibly the biggest challenge facing both landlords and lenders is to get to grips with how these changes will be implemented in the real world. For example:
Assessing landlords for tax liabilities is challenging when the tax landscape keeps changing, leaving both landlords and lenders in a state of confusion about where they stand.
Landlords who are re-mortgaging may be able to show evidence of actual rental income on a property, as may landlords who are buying a property which is already let, but landlords buying owner-owned properties or new builds will presumably have to rely on comparables, which raises the question of how these will be assessed.
While it may be fair to say that a landlord’s ability to run one property effectively indicates that they may well be able to do the same with another, there may be very good reasons why a landlord may have an unprofitable property in their portfolio, at least over the short- to medium-term, for example they need to refurbish it or they are aiming to sell it. How are lenders to assess these kinds of situations effectively?
The mortgage market and incorporation
Over recent times, there has been a great deal of debate over the advantages and disadvantages of private landlords transferring their portfolios to incorporated companies. The headline advantage of this move is that it can be used to cancel out some of the negative effects of recent tax changes in the private BTL market. This move, however, does bring its own risks in that it must be undertaken absolutely correctly to be both legal and tax effective and that the fact that incorporated companies operate to a slightly different set of rules to private landlords also has its disadvantages. In particular, there is the fact that mortgage lenders treat incorporated companies very differently from private individuals. With this in mind, anyone contemplating moving their properties to an incorporated company is strongly recommended to seek professional advice first.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Some Buy to let and commercial mortgages are not regulated by the FCA.