Amidst a lot of speculation about an early increase in interest rates in September the Monetary Policy Committee of the Bank of England maintained the bank rate at a record low of 0.25%. However the Committee hinted that the cost of borrowing could increase in the coming months and market sentiment is that there is an 80% chance of an early rate rise. In September the tightening of underwriting standards by the Prudential Regulation Authority (PRA) came into effect. This is likely to decrease the supply of credit available to landlords. Borrowers now have to disclose more comprehensive financial plans and show the ability to repay their mortgage at a 5.5% interest rate.
The Council of Mortgage Lenders (CML) expects BTL lending of £35 billion in 2017 and £33 billion in 2018 compared with the previous CML forecast of £38 billion in each year. This is a decrease of around 8% in 2017 and 13% in 2018. CML director Paul Smee commented “BTL had a weak start in 2017 and the sector’s contribution to overall net mortgage lending has fallen considerably over the last year. While falling mortgage interest rates helped to support borrowing, tax and prudential measures are exerting pressure on the BTL Market.”
In the past year BTL activity was largely driven by re – mortgage lending which accounted for over two thirds of total lending. The number of loans for BTL house purchase remained low compared to the activity seen before the change in stamp duty on second properties introduced in April last year.
The National Landlords Association reports that landlords are already finding it harder to arrange mortgages with 43% saying that the process of obtaining finance has become more difficult since the beginning of the year. Borrowers are quite rightly opting for five year fixed rates as a hedge against future increases in interest rates in the short to medium term.
The availability of BTL mortgages has been one of the main enablers of the BTL market and it is clear that the rules of the game are changing. How should BTL investors respond? The first step to consider re – mortgaging before the anticipated increase in interest rates comes into effect. Sound business planning and prudent management of an existing portfolio will help to secure new finance but if that is not available from the mainstream lenders consider applying to the specialist BTL mortgage companies.