The document “Underwriting Standards for Buy-to-Let Mortgage Contracts” finalises conclusions from the industry’s March consultation paper. Although labelled a consultation, the proposals felt more directive than collaborative. The finalised statement closely mirrors the initial document, leaving minimal scope for significant change.
Lenders will adapt their offerings in the coming months to align with these new guidelines. This period promises interesting developments as the industry integrates these standards into its products.
Many expect stricter rental calculation requirements, as demonstrated by TMW’s policy of 145% of a notional 5.5%. However, fixed-rate terms over five years and like-for-like remortgages may be exempt from this rule. These tougher rental prerequisites prompt questions about investors’ next moves. Will they shift towards commercial or semi-commercial properties, which are not subject to PRA regulations?
Another possibility is to explore higher-yielding assets, such as Houses in Multiple Occupation (HMOs) or multi-let properties. These offer greater rental income potential, enabling lenders to provide more favourable loan-to-value ratios.
This situation creates opportunities for mortgage advisers to expand their expertise. Understanding HMO regulations and lender criteria is essential for guiding investors in this evolving landscape. As the industry responds to the PRA’s changes, innovation and strategic planning will shape the future of property investment. Adapting to these shifts will be critical for both investors and advisers to succeed in the UK mortgage market.
Buy-to-let Sector | HMOs
In recent developments, the Prudential Regulation Authority (PRA) has released a highly anticipated document outlining underwriting standards for the buy-to-let sector, prompting speculation on its potential impact on property investment strategies. The publication “Underwriting Standards for Buy-to-Let Mortgage Contracts” essentially solidifies the directives proposed in the March consultation paper. Contrary to the term “consultation,” industry insiders note that the finalised supervisory statement closely mirrors the initial proposals.
The ensuing months will undoubtedly witness a shift in lenders’ strategies as they endeavour to align their product offerings with the newly defined rules. It is anticipated that a trend toward adopting higher rental calculation requirements, exemplified by TMW’s 145% of a notional 5.5%, will become more prevalent. However, exceptions exist, particularly for five-year fixed rates and like-for-like remortgages.
Property investors may find themselves exploring alternative avenues as the rental requirements escalate. Commercial and semi-commercial properties that fall outside the PRA’s proposals could become more appealing. Additionally, investors might be drawn to higher-yielding properties such as Houses in Multiple Occupation (HMOs) and multi-let properties, leveraging the potential for increased rental income to enhance the loan-to-value ratio available from lenders.
Against this backdrop, mortgage advisers not currently involved in the HMO market are urged to familiarise themselves with the intricate rules and regulations governing these property types and the diverse criteria set by lenders. This proactive approach positions advisers to guide clients effectively amid the evolving landscape.
A take on HMO
Understanding licensing requirements is essential for navigating the complexities of Houses in Multiple Occupation (HMOs). A property requires a mandatory licence if it has three or more floors and five or more tenants sharing facilities. To secure this licence, landlords must demonstrate compliance with building and fire safety regulations.
Even when a mandatory licence is unnecessary, local authorities may impose additional or selective licensing. These requirements could apply to properties with fewer floors or specific local conditions. Potential HMO buyers should consult local councils to confirm licensing obligations, which can significantly impact mortgage eligibility.
Mortgage criteria often depend on whether an HMO property requires a licence. Some lenders prefer properties that do not require mandatory licensing. For instance, in some regions, a four-bedroom property over two floors might qualify as a multi-let without a licence. However, tenant numbers, door locks, single tenancy agreements, and landlord experience influence lender decisions.
Lenders such as BM Solutions, Fleet, and Precise offer different policies for licensed and unlicensed HMOs. Their terms often depend on the number of tenants or specific property features, like internal door locks. Specialised lenders such as Shawbrook, Paragon, and Interbay offer tailored solutions for larger HMOs with 10 or more tenants.
Given these complexities, many sourcing systems lack the precision to handle intricate HMO requirements. Advisers must allocate time to understanding each lender’s criteria. With challenges in the buy-to-let sector, including the PRA’s supervisory statement, advisers with in-depth knowledge are better positioned to navigate changes and seize emerging opportunities.
This structured approach ensures compliance while enhancing prospects in the competitive UK mortgage market.
How We Can Help
At Connect for Intermediaries, we work with a wide range of specialist lenders to secure buy-to-let solutions for every type of landlord. Whether you’re navigating HMO licensing or expanding a limited company portfolio, we offer personalised advice and access to exclusive products.
If you’re starting out, check our Adviser Mortgage Network for the Newly Qualified page to see how we support new advisers working with property investors.
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