NRLA Mortgages boss briefs Government advisers
Rising mortgage rates have never been far from the front pages in recent months. Doug Hall, director of NRLA mortgage provider 3mc has addressed Government advisers for the Department of Levelling Up, Housing and Communities (DLUHC) on what the changes mean for landlords – and the potential consequences.
The last few months have been a challenging time for those looking for a mortgage, be that owner occupiers or buy to let landlords.
As the cost of mortgage lenders’ fixed rate borrowing costs (swap rates) soared, alongside promises of increased base rates from the Bank of England, hundreds of mortgage products were hastily withdrawn from the market – at one point up to 300 in a single day.
While these products did reappear, they had been repriced at significantly higher rates.
The NRLA approached the department to address advisers on the impact of these changes on the ground, and the potential long-term consequences, and - with DLUHC on something of a fact-finding mission as regards to the state of play in the market - NRLA Mortgages was invited to address the department.
The key facts
We were keen to stress that issues lie not only with interest rates themselves, but changes to stress testing rates, which has a huge impact on the amount that landlords – and other buyers – can borrow.
As part of their affordability assessments, buy to let lenders use interest cover ratios (ICRs) to calculate how much profit a landlord is likely to make. A lender's ICR is the ratio to which a property's rental income must cover the landlord's mortgage payments, tested at a notional stress rate.
Before 23rd September the buy to let ‘stress rate’, on average, was 5.5% with an Interest Coverage Ratio (ICR) requirement, ranging on average from 125% to 145%.
Maximum loan amount based on monthly rental income:
Calculation - Monthly rental income x 12 (for annual rent) divided by the stress rate % divided by the Interest cover ratio %.
Example: - £1,000 monthly rental income x 12 = £12,000. Divided by 6.5% (stress rate) divided by 145% (ICR) = A maximum advance of £127,320.
Post 23rd September, the stress rate, with some lenders, went up to 8.5%, significantly reducing the amount Buy to Let borrowers were able to borrow, as detailed in the table below.
|
125% (ICR) |
£1,000pcm Rent |
145% (ICR) |
|
£174,545 |
5.5% (stress rate) |
£150,470 |
|
£147,692 |
6.5% (stress rate) |
£127,320 |
|
£128,000 |
7.5% (stress rate) |
£110,344 |
|
£112,941 |
8.5% (Stress rate) |
£97,363 |
In 2016 the Prudential Regulation Authority (PRA), which regulates the majority of mortgage lenders issued a supervisory statement, known as SS13/16, providing new guidance to lenders for underwriting standards which were implemented in 2017.
The purpose of the supervisory statement was to:
(a) Outline the PRA’s expectation of minimum standards that firms should use to underwrite buy to let mortgage contracts; and
(b) Clarify the PRA’s expectations in relation to the application of the small and medium-sized enterprise (SME) supporting factor on Buy to Let mortgages.
Remortgages
To avoid existing borrowers being adversely affected when remortgaging, the supervisory statement details when it comes to pound for pound remortgages, lenders have the right not to stress and have applied this philosophy to their existing customers when looking at product transfers. However, the hurdles are currently higher when it comes to looking at new lender options.
The impact
Anecdotally we know a number of landlords, for a variety of reasons, charge below market rents, but for those coming to the end of their current mortgage product and potentially seeing their mortgage payments going up, this may no longer be realistic.
For tenants this will inevitably mean rent increases, as landlords make sure that the books are balanced, and they can service their debts. However, this is coming at a time when the cost of living is increasing across the board and many people are struggling to make ends meet.
The long-term future is unclear, however it’s not all doom and gloom. Things are starting to change, and we have seen rates fall slightly in recent weeks. That said it would be unrealistic to expect them to back to the levels we have been used to over the last few years any time soon.
It is vital the Government understands the impact that both interest rates and stress rates are having on borrowing and the pressure that places on landlords and tenants as a result. We look forward to working with Government to explore creative ways of tackling the issue.
