Analysis of the Buy to Let market by the Council of Mortgage Lenders (CML) has predicted the possible future of the sector, including the impact of changes, potential consumer trends and actions to be taken by lenders. The study used rental and capital value data to evaluate the potential market impact of a general move towards enhanced underwriting criteria.
What will be the impact of the 2017 changes in tax relief?
The Buy to Let 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. Some important policy alterations are upcoming, 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 Buy to Let borrowing at higher interest cover ratios (ICRs) and stressed rates, which will have the biggest impact on Buy to Let.
Now that the Prudential Residential Authority (PRA) have issued its supervisory statement on underwriting standards for the Buy to Let 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.
Remortgaging accounts for a significant part of the Buy to Let market, and remortgaging capacity is driven in part by how much rents have changed since the original loan was taken out. Now that the PRA have issued the statement to deploy affordability testing, some consumers may find it harder to remortgage to another lender.
What will any changes in consumer behaviour look like?
The CML analysed the impact that the PRA statement could have on buying behaviour, using the new rules around ICRs and stressed rates on new lending and remortgage activity. The CML predicts that this change would see a shift in buying behaviour, to a focus on lower value, often higher yielding property, which would increase the collateral risk profile of new purchases.
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 Buy to Let market will continue to thrive despite changes and criteria adjustment. But the CML also suggests that with one in five house sales being property investment, there are worries among policymakers that 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 Buy to Let 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 Buy to Let 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.
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