Buy-to-Let mortgage rates fell to just 2.76% in February. This is the lowest since January 2012 which is when the rates begun being recorded. When interest rates fall, consumer demand increases. There’s more going on than meets the eye though.
While the interest rates are at a record low, there’s fees attached to access the deals, tax changes already in place with more to come, in addition to more stringent affordability tests to access Buy-to-Let mortgages. Each of which should be considered prior to applying.
Major Considerations before Investing in Rental Property
Buy-to-Let mortgages generally have high arrangement fees attached to them. The best rates are often on the two-year fixed term deals. However, as the property investment market is undergoing significant changes, it may be wiser to invest early in longer-term fixed rate deals to avoid some of the tougher affordability tests due to come in later this year, affecting landlords with four or more properties (Portfolio Landlords).
One of the advantages just now with the deals is that it’ll stave off the effects of the changes to affect portfolio landlords. It’ll only buy some time though because the changes are still going to affect all landlords – eventually!
It’s probably fair to say that the Bank of England’s Prudential Regulatory Authority has the property investment market in its sights.
Last April a 3% Stamp Duty was imposed on residential landlords. Starting from this April, tax relief will gradually be tapered down for finance costs associated with rental property, such as the interest you pay for finance and mortgage arrangement fees, which can be high. This coming tax year will see a 75% restriction, gradually being phased down to the basic rate of tax relief of just 20%.
It’s definitely something to consider if you’re intending to tie into a five-year fixed-term Buy-to-Let mortgage deal. There are some competitive deals around at the moment, but given the current changes facing landlords now and the near future, long-term financial planning should be done so you can go into property investing with your eyes open. There are significant changes on the horizon.
Also worth considering is if you rent the property and later sell it, perhaps to cash in on a rise in property prices… because you’re selling property that’s not your home, you may be liable for Capital Gains Tax.
The New PRA Guidelines for Lenders Assessments
Prompted by the rapid growth of the property rental market, the PRA are acting to ensure appropriate lending standards are applied to all Buy-to-Let mortgages.
The affordability tests for BTL mortgages
Following a review of the Buy-to-Let mortgage market, the PRA has issued new affordability assessment guidelines. The assessments won’t just cover the interest on any mortgage. It’ll also take into account any property management fees, council tax, repairs to the property etc. In addition, part of the affordability test with some lenders will also take into account the persons’ tax rate as the additional income may push a landlord into the higher bracket for tax liability at 40% or 45%.
Furthermore, lenders typically want to see landlords’ affordability assessment show that the rental income covers the whole of the monthly mortgage repayment plus 25%. For example, a mortgage costing £400 should have a rental price of £500 a month. This is increasing, with some lenders already having increased the rate to 145%. Using the same example of a rental price of £400 per month, the rental price would need to increase to £580.
In practice, when considering a property for rental, it’s worth considering what rental price the property could fetch. It should be a minimum 145% above whatever the monthly mortgage price is.
If you fail to take into account the rental price the property can reasonably be expected to fetch, you may find lenders refuse your application based on failing to satisfy the affordability tests.
Portfolio Landlord Changes
This is the most significant change to Buy-to-Let mortgages in some time. A Portfolio Landlord is someone who has four or more properties. From September 2017, when applying for Buy-to-Let finance, lenders need to assess the entire portfolio and not just assess the risk based on the individual property.
For example, a landlord with five properties in his or her portfolio will be required to provide lenders with financial details associated with each property, proving the rental income and the amount borrowed on each property as well as associated costs for each. It won’t matter if the mortgage products are with different lenders. The entire portfolio will be evaluated.
When that time comes, it may even see an increase of specialist mortgage providers such as Precise Mortgages, GoDirect.co.uk, and The Business Mortgage Company.
Another thing to note with specialist lenders are some are reactive to the changes. An example of that was witnessed when the Stamp Duty was imposed last year. Some specialist lenders made their offers attractive by offering cash back at a level of at least 3% to offset the cost of Stamp Duty that borrowers would have to pay.
Buy-to-Let finance is seeing rates drop. However, it’s only the cost of finance that’s dropping. Operational costs for landlords are increasing because of restrictions on tax relief in addition to how Income Tax will be calculated in the future.
What may lock in savings today could carry associated costs further down the line.
If you’re tempted to invest in a property with a view to renting as a landlord, the best investment you could take is to seek professional advice before diving in with an application for a BTL mortgage – in particular if you already suffer with a poor credit history.
The reason being that lenders are tightening up on the lending criteria they use, therefore, it’s pertinent to get advice first and only when you’re sure it’s the right choice, then to seek a mortgage lender in line with the level of risk they’re being asked to take on. In other words, make your first application count because it’ll impact on your credit report, thus affecting all future mortgage applications.