Since the Prudential Regulatory Authority (PRA) changed the way that buy to let (BTL) mortgages are underwritten, the rules around BTL mortgages have become more strict.
This has meant that some BTL investors have been unable to borrow the same level of BTL mortgage that they could previously borrow under the old rules.
This resulted in it becoming more difficult for BTL investors to get the mortgages they need in order to put their plans in to place.
The good news is that over the last 12 months, innovation in the BTL mortgage market has resulted in some solutions for BTL investors.
5 Year Fixed
5 year fixed rates fall outside of the PRA rules. This has meant that many lenders have taken the opportunity to provide a more relaxed stress test for buy to let mortgage fixed rates of 5 years or more. Some specialist lenders have seen this as an opportunity and make the stress test of 125%-145% of the pay rate.
This can give BTL investors the loans they need, however it’s important to note that rates will be higher and potentially, so will be the associated fees.
Like for Like
A good move by some BTL mortgage lenders was to offer better stress tests for ‘like for like’ buy to let remortgages. This means that as long as a BTL investorsisn’t planning to release any equity, they can remortgage using a stress test rate which is more aligned with the old rules meaning that they aren’t tied to their existing lender.
Due to the changes in tax rules around BTL mortgage interest, there has been a noticeable increase in the amount of BTL investors setting up limited companies. Due to the different tax treatment, some lenders who offer limited company BTL mortgages offer slightly better stress test rates (i.e. 125% as opposed to 145%).
This can help, but a) the rates and fees tend to be higher and b) whether a limited company approach is right for an investor depends on their individual circumstances. Independent financial, tax and accountancy advice is therefore highly recommended.
Basic Rate Tax Payers
Basic rate tax payers will not be as affected as higher rate tax payers due to the BTL tax changes. As a result, some lenders will offer basic rate tax payers a higher BTL mortgage amount than a higher rate tax payer.
As a result, we have seen many BTL investors either transferring equity to spouses who are basic rate tax payers for remortgages, or buying in their name only for BTL purchases.
Again, there are potential legal and tax implications with this approach so independent and specialist advice is recommended.
For BTL investors with sufficient disposable income, some lenders offer an approach called top slicing which can be beneficial for BTL mortgages. This involves using a BTL investors personal disposable income to make up the difference between the actual rental income and the stress tested rental income amount that the lender requires.
In order for this approach to be successful, a full income and expenditure analysis is required so advice from a mortgage specialist is the best approach.
Joint Borrower Sole Proprietor
Following on from the above, the joint borrower sole proprietor mortgage approach could also be useful. Joint borrower sole proprietor (JBSP) mortgages enable people (usually a family member) to be added to a mortgage, but not be on the deeds. This means that their income can be used when calculation potential mortgage amounts, but they will not be the legal owner which can be beneficial for stamp duty land tax planning (potentially avoiding the 2nd property levy).
Although this approach is more common with residential mortgages, we have used it in the right circumstances for BTL investment mortgages. It can also be useful for let to buy, but this will not help with SDLT planning.
In summary, the good news is that regulation has been blended with innovation. This means that the market can be sustainable and not stifled.
However, it’s important to seek independent and professional advice before proceeding in order to ensure that you get the best solution and avoid any costly mistakes.