A Clearer View

Together with the team at Private Finance, we provide a useful guide on what is happening in the buy-to-let mortgage market, including the latest legislation and lending updates.

Firstly, what is stress testing and how does this impact borrowing?

In the buy-to-let (BTL) market, potential rental income is considered when assessing borrowing. Lenders carry out a stress test for fixed and variable rates to work out the maximum borrowing. These stress rates vary depending on which product you select, with a five-year fixed typically being most favourable.

Since the Prudential Regulation Authority (PRA) started regulating BTLs in 2017 there has been a need for lenders to apply a ‘stress test’ when assessing maximum borrowing for BTLs. Lenders will typically, for a two-year product, use the mortgage rate + 2%, and require mortgage cover of 145% for higher rate taxpayers, 125% for lower rate or corporate structures. Lenders can apply some leniency to the stress rate when looking at five-year fixed products. The lower the stress rate, the more the borrowing the client can obtain. 

Historically, many landlords have maximised borrowing in the low-rate environment, as this allowed the return on investment to be higher by having a lower capital requirement. Now many landlords are coming to refinance and found in some cases they cannot do so under current rates and stress testing. 

Our top insights – what are landlords doing in this higher rate environment?

Maximising Borrowing

Since the heights of Q4 2022, rates across the board have been reducing. This in turn (albeit with a slight delay) has reduced ‘stress rates’ for buy to let mortgages, meaning landlords could borrow more now than they could last year. 

That being said, lots of landlords are still struggling to borrow the same amount as they did two or five years ago, when rates (and by proxy stress rates) were lower still. As such, lenders have had to come up with some inventive ways to stretch borrowing further for landlords.
These include:

• Using earned income, or surplus income across the portfolio, to boost borrowing amounts
• Offering products with high fees (often 3-5% of the loan amount) with a much lower interest rate (as low as 4.59%) to allow for better stress tests and therefore more borrowing

The lenders that are offering the above options are specialist and typically not available other than via a mortgage broker. It is worth noting that the high fees noted above, along with any broker fees, could be offset for tax purposes*.

*Disclaimer – please note, we are not tax advisors and the above does not constitute tax advice. We strongly recommend that you seek tax advice from a relevant professional where required’.

Incorporation of Portfolios from personal name to Limited Company

As has happened in the past when rates increased, we are seeing a rise in Limited Company buy-to-let lending. 

Particularly for higher rate taxpayers, given recent tax changes, this is becoming more attractive as these landlords are more restricted in what they may be able to offset as a tax-deductible expense. If they were to incorporate their properties into a limited company structure, there is the ability to potentially offset more costs (particularly interest costs) to minimise profits; it is also worth noting that if incorporating more than one property, landlords could benefit from reduced rates of Stamp Duty (we can recommend landlords to a specialist in this area) *.

If you are finding that your tax bill isn’t quite matching up with your raw portfolio figures and this is not sustainable long-term, it may be worth exploring this option.

*Disclaimer – please note, we are not tax advisors and the above does not constitute tax advice. We strongly recommend that you seek tax advice from a relevant professional where required’.

Landlords being clever with Energy Performance Certificate (EPC) regulations

Another trend on the rise is landlords, being property people and wanting to stay in the property market, having to come up with their own clever ways to make BTL investing viable.

Given the changes to EPC regulations we are seeing more of an appetite for refurbishment lending (sometimes with conversions to HMOs), conversions from BTL to commercial and also the splitting of houses into flats, all of which could increase the yield of the investment.

Such lending is niche and can be incredibly expensive if you find your way to the wrong bank; often we can find lenders to lend 75% loan-to-value (LTV) (and occasionally 100% of the works), on competitive terms, to ensure the true cost to the client isn’t any higher than it needs to be.

Contact your local Carter Jonas office who can put you directly in touch with the Private Finance buy to let mortgage team today

The BTL market has significantly changed over the last five years. Our team of specialist buy-to-let mortgage brokers can help you find the best deal available for you.

• Whole-of-market broker using over 160 lenders.
• Strong relationships with the specialist BTL lenders, including those private banks who do not have a high-street presence.
• Bespoke BTL mortgage solutions.
• Experts in dealing with BTL portfolios and Limited company BTL lending

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

© Private Finance Limited, 2023. Private Finance provides independent mortgage advice and arranges individual mortgage solutions for clients. Private Finance is a trading style of Private Finance Ltd, 29 Lincolns Inn Fields, London, WC2A 3EG, registered in England no. 3855776 and its Appointed Representatives. Private Finance Limited is authorised and regulated by the Financial Conduct Authority (FCA registration number 310566). 

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