When it comes to the BTL market, it has its fair share of supporters and critics. Recently, it’s become clear the Conservative Government and Bank of England’s (BOE) regulatory body, the Prudential Regulation Authority (PRA), fall in the latter camp.
Of course, having critics is a great way to improve and become better. And, the PRA has a specific mandate to fulfil. To ensure UK financial regulations keep the industry in order while also safeguarding the broader economy.
PRA Regulations Affecting BTL Lending
BTL lending has come under much scrutiny from the PRA. As we already stated, this is understandable – it’s their job. However, the changes they have enacted that are already in place and due to in 2018 aren’t agreeable to everyone.
- January 2017 – tougher stress testing for BTL mortgages. Lenders must now assure the borrower’s rent will cover 145% of the monthly mortgage repayment and at an upper interest rate of 5.5%. The current average BLT mortgage interest rate is closer to the 3% and has been for some time.
- September 2017 – BTL landlords – termed portfolio landlords – with four or more properties will be subject to even tougher rules. When they apply for even one mortgage, the lenders will have to assess the entire portfolio. That’s regardless of whether the landlord holds other mortgages elsewhere.
These new rules come amid other changes from the Government, which also raises the cost of buying and running even one BTL property. Put together, it seems tough. But, it’s also a good way to ensure the BTL market shouldn’t ever jeopardizes the UK’s financial stability.
According to UK housing minister, Gavin Barwell, Landlords aren’t the focus of the changes. He says, phasing out tax relief and accounting practice changes are to appease PRA concerns the BTL market could cause a price bubble.
Calls for a Softer Touch
Keeping a watchful eye on BTL lending practices, is definitely necessary. But, this tougher PRA approach isn’t universally popular. Some market participants say a few tweaks would benefit landlords, tenants and lenders.
One area subject to criticism, is the lack of distinction between the Loan-to-Value (LTV) ratios of BTL mortgages. This means that all BTL mortgages come under the same scrutiny whether the mortgage is 95% or 35% LTV.
In addition, raising the stress testing of mortgage interest rates from 5% to 5.5% seems a little harsh. Particularly when the possibility of rates hitting that level as an average, is low. Surely it would make more sense to phase in a higher stress test level. But to do it, when BOE rates and mortgage interest rates begin to rise. That would certainly make it easier on BTL landlords whose borrowing practices are on the margins.
BTL Mortgage Activity Languishing
It appears that BTL landlords and lenders are both exercising more caution – stringently! The number of BTL mortgages has slumped sharply since April 2016. And, expectations are that more landlords will exit the market, or reduce their portfolios in the next few years.
The Government plans to provide more rental properties in the next three-to-five years. Despite this, there is still a place for smaller landlords in the private rental sector.
Uncertainty over the economy, Brexit and house building are set to remain high for some time. Against that backdrop, changes to the new BTL mortgage and tax rules aren’t anticipated.
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Rent 2 Rent specialists, London
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