Buy-to-let sector
Last week marked the release of a highly anticipated paper by the Prudential Regulation Authority (PRA) addressing underwriting standards in the buy-to-let sector. Liz Syms delves into the details by examining the potential impact on investors’ property strategies.
The document, titled “Underwriting Standards for Buy-to-Let Mortgage Contracts,” solidified the conclusions outlined in the industry’s consultation paper from March. Despite the term “consultation,” many perceived the proposals as more prescriptive than collaborative. Notably, the finalised supervisory statement resembles the initial consultation paper, leaving little room for substantial deviation.
As the industry absorbs these guidelines, the forthcoming months promise a fascinating observation of how lenders translate rules into their product portfolios.
Anticipations lean towards an industry-wide shift towards more stringent rental calculation requirements, exemplified by TMW’s stipulation of 145% of a notional 5.5%. However, exceptions exist for fixed-rate terms exceeding five years and like-for-like remortgages.
The escalation of rental prerequisites raises intriguing questions about property investors’ reactions. Will they redirect their focus, perhaps, towards commercial or semi-commercial properties that stand outside the PRA’s ambit?
Investors will likely explore alternatives, including higher-yielding properties such as Houses in Multiple Occupation (HMOs) and multi-let properties. The allure lies in the potential for augmented rental income, contributing to an expanded loan-to-value ratio offered by lenders.
This juncture presents an opportune moment for mortgage advisers, especially those unfamiliar with the HMO market, to acquaint themselves with the regulations governing these property types and the diverse criteria set forth by lenders. As the industry adjusts to the PRA’s directives, strategic shifts and innovative approaches are on the horizon for property investors and mortgage professionals alike.
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 in the case of 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, falling beyond the scope of 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 acquaint themselves with the intricate rules and regulations pertaining to these property types and the diverse criteria set forth by lenders. This proactive approach positions advisers to guide clients effectively amid the evolving landscape.
Buy-to-let Sector | A take on HMO
Diving deeper into the specifics of HMOs, understanding licensing requirements is paramount. A crucial stipulation mandates a license for properties with three or more floors and five or more tenants with shared facilities. Obtaining this license necessitates demonstrating compliance with building and fire regulations.
Even when a mandatory license is not applicable, local authorities can enforce additional or selective licensing for properties with fewer floors. Advisers should direct potential HMO property purchasers to the local authority to confirm any license requirements, recognising the impact on mortgage criteria.
The nuances of mortgage criteria come into play, with some lenders only considering HMO properties that do not require a license. For example, a four-bedroom property spread over two floors 
may qualify as a multi-let without a license in certain localities. Other factors, such as the number of tenants, internal door locks, tenants named on a single agreement, and the property investor’s experience, also influence lender considerations.
Lenders like BM Solutions, Fleet, and Precise exhibit varying approaches to licensed and unlicensed HMOs, often dictating terms based on factors such as the number of tenants or the presence of internal door locks. Specialised lenders like Shawbrook, Paragon, and Interbay come into play for larger HMOs with 10 or more tenants.
Given the intricate details involved, most sourcing systems fall short, underscoring the importance of advisers investing time in comprehending lenders’ criteria. Amidst the challenges facing the buy-to-let sector, including the PRA’s supervisory statement, advisers equipped with specialised knowledge are poised to navigate the changes effectively and capitalise on emerging opportunities.
We reached the end of our publication on Buy-to-let Sector | Prepare for PRA Rules to Drive up HMO Interest | 2016; until next time, stay Connect!