REVIEW
BUY-TO-LET
BTL affordability is anything but simple… Philip Daffern senior key account manager, SimplyBiz Mortgages
“I
want to borrow the maximum amount possible, at the best rate, with the minimum deposit.” How many times have you had that question, particularly from buy-to-let (BTL) investors? Property has proven time and again to be a very stable asset class, with investors and opportunists turning to the private rental sector (PRS) for a solution in diversifying portfolios. With current global economic and political uncertainty causing instability in all markets, the focus on property is more intense than ever. However, with the looming challenges landlords will face from a green and Energy Performance Certificate (EPC) agenda, cost of living increases, and a rising rate environment, one of the major difficulties in the market is borrowing power – how much can landlords churn, or how much deposit are investors going to need to find? “Five-year fixed-rate BTL products will always provide more liberal affordability than other product types.” This is the sort of sweeping generalisation that gets referenced repeatedly – and with headline calculations of 125 per cent rental coverage at product payrate, this has got be correct, hasn’t it? To make affordability even more complicated, following the changes to the Prudential Regulation Authority (PRA) introduced in 2017, advisers also need to consider personal tax status, overall property ownership, Limited Company lending, portfolio landlord definition, and a host of other nuances.
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MORTGAGE INTRODUCER APRIL 2022
To help navigate, digest, and interpret the BTL affordability landscape, I enlisted the help of Mortgage Broker Tools (MBT), an affordability platform perfectly placed to support simplifying the BTL affordability conundrum. Utilising MBT Analytics, I endeavoured to answer a very simple question: Are five-year fixed rates more liberal for affordability, and has this changed? Using an average rental income of between £1,000 and £1,200, MBT Analytics provided some interesting reading, starting with a direct comparison between two-year and fiveyear lending over the past 14 months.
“There is a lot to grasp, and I would encourage advisers to keep their education as upto-date as possible, because things change so rapidly in the marketplace. Enlist help from lenders, BDMs, events, technology, peers – there is plenty of support available to advisers to help” It came as a surprise to find that there was not a huge difference in affordability across the two product ranges, with the five-year option providing slightly over £20,000 more lending capacity in February 2022. The likely reason behind them being so close is seen in several niche lenders offering more generous terms for twoyear deals. This sparked the inner data geek in me, and I was prompted into a deeper dive. In terms of affordability for five-year fixed lending across the market, there is a stark disparity between the highest and lowest loan sizes – over £220,000 in January 2022. At this point I realised
how complicated justification and suitability must be when comparing products from an affordability research point of view. Additionally, and incredibly, there are numerous examples of five-year fixed rates yielding much less lending power than some of their two-year fixed counterparts. The data also points toward the gap narrowing between the product demographics. Taking the extremes in lending, the gap has diminished from £81,000 in 2021 to £21,000 in 2022. We can attribute this change to several factors, including bespoke and more liberal interest coverage ratio (ICR) calculations and top slicing. It is also clear that the wider outlook for affordability has changed in the past 12 months, with both product types becoming more liberal in lending capacity, an increase of £40,000 in 2022 for five-year lending and, staggeringly, £100,000 for two-year. If maximum lending capacity in isolation is the most important preference in the advice journey, after digesting the research and detail, it is almost certain that a five-year fixed product will generate the largest loan size. However, the devil is in the details, and advisers will need to understand the finer points of criteria to get the best outcome. There is a lot to grasp, and I would encourage advisers to keep their education as up-to-date as possible, because things change so rapidly in the marketplace. Enlist help from lenders, BDMs, events, technology, peers – there is plenty of support available to advisers to help. One thing is certainly clear: BTL has a number of complexities, affordability among them, with advisers having to consider five-year, two-year, and differing tax statuses. It’s a confusing segment of the market. This is one of the reasons why SimplyBiz Mortgages created BTL+, primarily launched to help and support advisers, whether experienced veterans or newer entrants, to diversify into BTL, promote understanding, and help simplify the complexities, whilst ensuring profitability and security in this key area of the market. M I www.mortgageintroducer.com