Buy-to-let lending squeeze: 'some banks won't lend at all'

The Prudential Regulation Authority, part of the Bank of England, is set to introduce stringent new rules on buy-to-let borrowing CREDIT: YUI MOK/PA

Stringent new rules for mortgage lending to buy-to-let investors with multiple properties could mean that some can no longer borrow to fund their business, Telegraph Money research has found.

Buy-to-let investors with four or more properties will find it harder to raise finance from the end of this month when tough lending regulations are introduced by the Prudential Regulation Authority, part of the Bank of England.

Landlords who seek finance after October 1 will have their entire property portfolio assessed for viability, as opposed to just the individual property concerned, as is currently the case.

Brokers surveyed by this newspaper said the changes would mean, at best, a huge increase in the amount of work landlords will have to do when they apply for a mortgage and, at worst, some landlords struggling or failing to get a loan at all. The market could also shrink as banks abandon this part of the market entirely. This would be likely to lead to higher fees and interest rates.

The Prudential Regulation Authority, a part of the Bank of England (whose governor Mark Carney is pictured) is set to deliver another blow to landlords CREDIT: ANDY RAIN/EPA

One of Britain’s biggest lenders, Santander, has already told mortgage advisers that it will cease lending to landlords with large portfolios who want to increase their borrowings. It will continue to lend for the purposes of “pound-for-pound” remortgaging, but even then only with tighter rules around purchase date and income.

Shaun Church of Private Finance, a broker, said: “Already we are seeing the mainstream lenders taking very different approaches to how they will work with these borrowers.

“Some are saying that if you have four or more properties we aren’t going to lend to you at all – probably because they don’t have the resources to deal with the extra workload. In the middle some are saying we will lend but it’s going to become much more complex.

“Then some of the more specialist lenders are more or less enforcing the rules already so there won’t be much change.”

Ray Boulger of John Charcol, another broker, said some smaller lenders such as Platform Home Loans had announced that they would no longer be carrying out this sort of work, while other, specialist lenders would be largely unaffected.

The new rules will apply only to individual landlords, not to those who own their portfolio through a limited company.

Who will be the winners and losers?

The rules are likely to place significant barriers in the way of many landlords, particularly those with larger portfolios. “How can you really expect to check someone with 100 properties or more?” Mr Church said. “It will become exponentially more difficult for them to get finance.”

Experts warned that, in addition to the extra work involved, a fall in the number of lenders prepared to operate in this market would lead to increased costs for borrowers.

“Whenever there is less choice and competition we always see an increase in cost,” Mr Church said. “It’s fair to say the cost of borrowing for portfolio landlords is likely to increase. If your lender had a rate that was market leading, you could well see that change.”

Mr Boulger said: “There will be a reduction in the number of lenders prepared to do this. Those that do still offer mortgages will be required to jump through a lot more hoops and borrowers will have to provide more information.”

The PRA lending squeeze is the latest in a string of hammer blows for buy-to-let investors CREDIT: SIMON DAWSON/BLOOMBERG FINANCE LP

And the nightmare scenario for landlords is finding themselves unable to remortgage. This could lead many to become “mortgage prisoners”, locked on their lender’s variable rate, which is usually much higher than the alternatives.

Mr Boulger said it was “inevitable” that some landlords would fall into this category, albeit a relatively small number.

“The people most at risk will be those in parts of the country where property values have done badly,” he added. “In London and the South East the chances are you will have seen quite a big gain, but in parts of the North and Northern Ireland prices have remained very low. This won’t help.”

But some banks could, if they master the new rules quickly, steal a march on their rivals. Mr Church said: “I think the winners are going to be the new ‘challenger’ banks. They will be coming in fleet of foot and will be able to make changes more quickly than the big banks. The likes of Halifax making changes can be more like turning an oil tanker.”

What can borrowers do?

As limited companies are unaffected by both these regulatory changes and the separate tightening of tax relief, it will be tempting for new landlords to choose this structure.

Borrowing as a limited company will mean you pay higher mortgage rates and have the other administrative costs involved in running a company, but is likely to be cheaper in the long term.

However, it would be very expensive for established landlords to transfer their portfolio to a company as it would create stamp duty and capital gains tax liabilities.

Instead, those investors should consider applying for any loans they need straight away. Mr Boulger said: “If you’re looking to remortgage at the moment get in quickly because some lenders are still working to the old rules. There will be less choice in a few weeks when the new rules come into force.

“One of the interesting questions is whether lenders will take a global view,” he said. “Will they want every property in a borrower’s portfolio to be viable, or if one or two are not making money but the portfolio is viable overall will that be acceptable?”

He added that more stringent requirements on personal income were likely to make a big difference to landlords at the margins – and drastically reduce their level of choice.

About | Buy to let tax changes

Former Chancellor George Osborne unveiled a shock tax change in 2015 that will remove landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.

The changes are being phased in from 2017 and fully implemented by 2020. From April 6, only 75pc of mortgage interest can be deducted against rental income to calculate profits. This decreases by 25pc each year until none can be accounted for in the 2020-21 tax year.

• Tax will now be due on turnover, rather than profit. If mortgage rates rise, but rents don't, landlords are quickly left out of pocket. For some, tax rates will exceed 100pc: landlords will have to pay all of their profit in tax, and then pay more tax still.
• Any higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020.
• For additional-rate (45pc) taxpayers, the threshold at which their investment returns are wiped out by the tax is when mortgage costs reach 68pc of rental income.
• But some basic-rate taxpayers will also pay more tax – because the change will push them into the higher-rate bracket.

How will the wider market react?

The buy-to-let market has had a tough few years. First in April last year the 3 percentage point stamp duty surcharge on second purchases created an extra cost to expanding your portfolio, and then the changes to income tax relief began to bite earlier this year.

By 2020 landlords will be unable to offset mortgage interest from their taxable profits, meaning a higher tax bill for most. Basic-rate taxpayers will receive a 20pc tax credit, so the change will primarily affect higher earners.

Lenders have also been forced to “stress test” their loans at a hypothetical interest rate of 5.5pc, despite mortgage rates generally being at an all-time low.

But the latest changes to portfolio landlords could be the worst blow of all. Mr Church said: “I don’t think people have really realised how far-reaching the impact on the market will be.

“We’ve had the tax changes and we’ve had plenty to deter the amateur landlord with the stamp duty surcharge, but actually this is the one that will affect the rest of the market and the big boys.”


http://www.telegraph.co.uk/investing/buy-to-let/buy-to-let-lending-squeeze-banks-wont-lend/