Through analysis of the current Buy to Let (BTL) market, the Council of Mortgage Lenders (CML) has predicted the possible future of the sector if it sees a general move towards enhanced underwriting criteria. Using rental and capital data, the CML have also evaluated the potential impact of upcoming changes, potential consumer trends and suggested actions to be taken by lenders.
What will be the impact of the 2017 changes in tax relief?
The BTL sector has been a big driving force behind much of the mortgage growth in recent years, but the CML are keen to highlight that the sector faces some big challenges in the near future, including the changes in tax relief to be phased in from 2017.
Not only could these changes affect volumes of business, but also change the way investors approach their portfolio plans. The main aim of most of the changes is to increase the cost, and therefore the incentive, of property investment, which in turn should decrease demand in the sector.
Is this the biggest upcoming change?
Despite the tax changes next year, the CML suggest that it will actually be changes in affordability testing on BTL borrowing at higher interest cover ratios (ICRs) and stressed rates, which will have the biggest impact on BTL.
Now that the Prudential Regulation Authority (PRA) have issued its supervisory statement on underwriting standards for the BTL sector, relevant firms will now have to apply affordability testing and use an ICR to determine whether personal income is sufficient to cover mortgage repayments.
What can the industry do to prepare for the future?
According to the CML, there is still very much a long-term case for investing in housing as part of a balanced portfolio, which means the BTL market will continue to thrive despite changes and criteria adjustment. But the CML also suggests that any sudden changes in investor demand could result in house price volatility.
The CML believe that overall, the market will see a moderation in the growth rate of BTL lending in the short term, with the Council suggesting that lenders need to start considering tracking and improving the control of the collateral risk profile of any new BTL lending. The CML believe the result of the PRA statement could be that more equity is injected in the market, with slower growth in lending volumes as a result.
The Financial Conduct Authority does not regulate some forms of Buy to Let.