Buy to Let Mortgages – A Guide for 2020

Buy to Let Mortgages are complex area which has seen several changes in the past few years. For those becoming First Time Landlords it may take some time to get familiar with the fundamentals of Buy to let. For Experienced Landlords recent tax changes to the person vs Limited Company ownership, different investment strategies and the portfolio landlord changes may be more prescient.

Recent History

To set the scene, after the 2007 Financial Crisis the market severely tightened up. I had what I would refer to as my first ‘proper job’ at this time, I was responsible for setting the interest rates and fees of Buy to Lets for a specialist mortgage lender. I remember vividly the day that Lehman Brothers went under and the shockwaves this sent to the British Buy to Let market. It created a sort of reverse price-war. Lenders needed to do business, but not too much, and only the right particular kind. The job became to put off riskier cases rather than win business. Reflecting on this time I can feel how close things came to economic collapse. In the post-2007 period we had mediocre growth and historic low interest rates, both of these have continued to this day. At present the Bank of England Base Rate is 0.75%, the highest base rate we’ve ever seen was 15% in October 1989. In response to the crisis the government dissolved the Financial Services Authority and introduced the Financial Conduct Authority and Prudential Regulation Authority in 2013. Moving forward to January 2017 the PRA introduced new affordability rules for Buy to Let. The market remained cautious. From the start of 2018 we started to see more competition amongst lenders, criteria began open up and we saw Lenders start to offer things like First Time Buyer Buy to Let, more liberal affordability criteria and higher Loan-to-Values. This trend has continued until present, somewhat dampened by Brexit-uncertainty the market is now keen to lend and we are thankfully in one of the best times to get a mortgage. Though we are still in the post-2007 era, with regulatory constraints and careful Lenders.

The Fundamentals

Buy to Let mortgages differ on a few core details:

• Affordability – Buy to Lets are designed to be ‘self financing’, meaning that the mortgage is paid from rental income from that property. This is different to residential mortgages, where you are expected to pay the mortgage from your wage. Calculations are used to ensure that the rental income covers the mortgage, running costs and contingencies. These calculations vary between lenders.
• Interest Only – Buy to let mortgages are usually done on an Interest Only basis. This means that the loan amount is not repaid which keeps the monthly payments low. At the end of the mortgage you would need to either sell or refinance the property. 
• Regulation – Buy to Let mortgages for business purposes are not subject to the same level of regulation as Residential Mortgages. However, our process at Uplift is equally comprehensive.

Tax Changes

There have been a few tax changes in recent years to income tax. We cannot advise on what these are (this is for the accountants) but we can say that many customers are now buying into Limited Companies as a result. Limited Company mortgages tend to cost more, but the tax advantages can outweigh the increase mortgage costs. We tend to find that when properties are being held for a length of time that the tax savings outweigh the higher costs of debt, though each ease is different

Affordability Rules

We are in a historically low interest rate environment. Concerned about potential future rate rises, the FCA introduced rules which ‘stress test’ the ability to pay the mortgage if rates increase. The standard interpretation was that you need to cover 145% of your mortgage if rates were to increase to 5.5%. For a 100k property value mortgaged to 75% this means you would need to have rent of £498. This equates to a 6% gross rental yield, which is pretty hard to meet in some areas of the country. We saw Lenders stick rigidly to this until around the last 18 months at which point some Lenders started to introduce flexibility. At time of writing there are lenders out there who will use the 5 year fixed rate to calculate for affordability purposes (instead of stress testing at 5.5%). This could mean the rent required for the same £100k property would be £273, a significant difference in affordability. There are other variations too, whether lending to a limited company or individual can have an impact as well as your personal tax banding. There’s a large amount of variation between lenders here, and as you might imagine those with the most generous affordability calculations tend to charge more. As an Advisor, affordability is the number one concern for the majority of my Buy to Let cases. So you can understand the numbers, here are the above two examples broken down:

So clearly, the rental income from the property is key. You will have your own estimate of this figure, but this is not the number the lender will use. When the valuer visits the property they will give the their view of both the property value and the current rental estimate. There’s room for a difference of opinion here, so if you’re up at the limit of affordability this can cause complications. It’s worth noting that the value will use the single-let unfurnished rental figure. For HMOs some lenders will use the full HMO rental figure, where some will value the property as a single let. This can seem quite conservative. Lenders will generally want to know they have a property they can sell quickly if they came to repossess, if the investment is only viable to HMO landlords this restricts the amount of potential buyers for them and could have an impact of sale value.

So how much rent do you need for your property? Here’s a chart which shows two lines, one using the conservative affordability calculations and the other with the more liberal figures. I need to clearly caveat that criteria does frequently change, these numbers may vary depending on your circumstances.

This example has used two potential hypothetical Lenders at 75% LTV. If you add in a few more choices, such as what LTV to mortgage to and whether to lend into a limited company things can become complex. We have a process to guide you through these decisions.  

Consumer Buy to Let vs Business Buy to Let

One of the regulatory changes brought into force after the 2007 financial crisis was the introduction of two new categories of Buy to Let:

• Consumer Buy to Let - refers to those who are ‘accidental landlords’. For example if you’ve previously lived in a property and then decided to rent it out you would fall under this category. The FCA gives you a higher degree of protection, like with residential mortgages. The idea of creating this category was to distinguish experienced investors from those who found themselves letting to others and may need extra help. Because this is a protected class, not all Lenders will do Consumer Buy to Let. There therefore tends to be a little less flexibility on criteria such as affordability.
• Business Buy to Let – this category is for professional landlords, if you’re buying a property for the sole purposes of investment it will fall under Business Buy to Let. This is often referred to as ‘unregulated’ because they are not covered by the same degree of FCA rules and cannot be escalated to the Financial Ombusman Service. However there are still Prudential Regulation Authority (PRA) rules that apply (like the Affordability previously discussed). I would say it’s more accurate to describe these as ‘lightly regulated’.

Investment Strategies

There are now a wide variety of investment strategies to landlords can take. Here’s a handful:

• Single Let – this is what most people imagine when they hear ‘Buy to Let’, renting to a single tenant or family on one Tenancy Agreement. This is the easiest strategy to place
• House in Multiple Occupation (HMO) – renting rooms separately to different tenants. Each tenant will have their own Tenancy Agreement. You need to be an experienced landlord with 6-12 months’ experience to get a HMO mortgage, though there are a couple of workarounds here. Most HMO lenders will go up to 8 bedrooms, some specialist lenders have no upper limits on size.
• Multi Unit Properties – this is commonly a house divided into multiple flats, or a piece of lend with separate buildings on it. From a Lender’s perspective they are treated much the same as HMO mortgages. From a Landlords view, the returns may be comparable to a HMO but have a touch less ‘hassle factor’.
• Serviced Accommodation – after the introduction of Airbnb and others there has grown a thriving Holiday Let economy in the UK. Most Lenders will still not accommodate these properties, though there are now thankfully a handful who will. Experienced landlords only here.
•  Corporate Let – this refers to letting to a company who may place their employees in your property over a period shorter than a typical Tenancy. It could be a manufacturing firm with a need to house project managers. It can be hard to find a corporate let, but profitable if you can.

Outlook for 2020

With all that complexity in mind, how do things look for this year? The criteria are numerous, rules complex and market unusual. But it can be navigated. The impact of global factors, Brexit, Trump, regulation and the post 2007 economic era have kept the market unusually dampened. Historically speaking, we would have expected to see a boom this long after a recession. However, it cannot be understated how large an impact 2007 had.  Banking analysts have to ‘price in’ uncertainty, they include it in their interest rates and costs. The more certain things become, the cheaper. After the election we saw a jump in the FTSE, the market reacted postiviely to knowing where they stood. As the troubles of the past few years become more defined and uncertainty reduces I believe we are ready for a growth period. Of course this is just an opinion, and I may be wrong. But I’ve started Uplift in the belief that there is an unprecedented opportunity for those who can adapt to the first boom of the post 2007 era.

Edward Clark

Managing Director

Uplift