In September this year, there will be a significant change to the rules around how lenders judge whether or not a person can afford a buy-to-let mortgage. Landlords will have to move quickly if they wish to secure new mortgages before these rules take effect.
Back in April 2014, new rules were introduced into the residential mortgage market. These rules obliged lenders to abandon the old model of calculating mortgage affordability on the basis of multiples of headline income and actually assess the applicant’s ability to repay the mortgage over the long term, even if interest rates were to rise.
As of September 2017, analogous rules will be introduced into the buy-to-let market, following a decision by the Prudential Regulation Authority, which is part of the Bank of England. While some may argue that both of these actions are a case of deadlocking a stable door after the horse has long since disappeared over the horizon, the fact of the matter is that even (almost) 10 years on, the bank bailouts of 2008 are still a painful and controversial memory and it can be safely assumed that politicians of all persuasions will be eager to avoid being put in the same situation again.
At this point (and up until September), lenders assess mortgages at an individual level, in other words, they look at the figures relating to the property for which a mortgage is being requested and taken a decision based on those alone.
Going forward, lenders will have to assess the overall strength of a landlord’s portfolio. It would be nice to think that in an ideal world, lenders would look at the profitability of the portfolio as a whole, rather than insisting that each and every individual property had to turn in a profit all of the time, but the fact of the matter is that as these regulations are new, nobody knows how they will actually be implemented in the real world or what their end result will be.
One very likely outcome is that buy-to-let mortgages will become more expensive for the simple reason that the price of a product reflects the work involved in bringing it to the purchaser and if the workload increases then there is a good chance that the price will increase as well.
The fear and frustration factors
Any change can be disruptive and how people react to the disruption often depends on whether or not they feel that ultimately they are going to benefit from the change. In the case of these new rules, lenders have to face the fear of repercussions if they grant a mortgage in a way a regulator later deems to be inappropriate and by the frustration of having an increased workload without any obvious payback for it in terms of extra income.
For landlords there is the fear of being unable to remortgage when they think best and the frustration of the extra work involved in applying for a mortgage. Putting these together, it is entirely within the bounds of possibility that both BTL lenders and small-scale BTL landlords will simply exit the market altogether, or at least curtail their operations.