Buy-to-let loan sizes and volumes will shrink, says S&P
THE BUY-TO-LET (BTL) mortgage market will see a drop in loan sizes and origination volumes due to regulatory changes, according to research by Standard & Poor’s.
The ratings agency said on Tuesday that the Prudential Regulation Authority’s (PRA) changes to BTL mortgages and lending requirements, combined with the UK government’s new tax regime, was likely to reduce net cash flow to BTL investors.
“We anticipate that the most immediate effect of the changes will be a drop in loan origination volumes,” said S&P Global Ratings’ credit analyst Alastair Bigley.
“We expect the average loan balance in a BTL transaction originated between 2014 and 2016 to fall to £165,000 from approximately £203,000, and the average loan-to-value (LTV) will fall to 47.9 per cent from 57.3 per cent if it was assessed today.”
The report also said that BTL properties in London and the South East will become less economically attractive, with borrowers needing to have substantially more equity in properties in the future.
“We estimate that of the BTL loans secured in properties in London and the South East underwritten in 2014-2016, 85.2 per cent would not be originated at the same LTV now, and, on average, borrowers would be required to pay an additional £60,000 deposit to lower the LTV to meet BoE affordability requirements,” Bigley said.
Standard & Poor’s also suggested that the risk profile of BTL lending may change going forward. Lenders will be forced to lend in a narrow LTV range and will start to develop other products that justify charging higher loan margins, the ratings agency said.
The UK government has been cracking down on what it sees as an overheated BTL market, which critics argue is coming at the cost of first-time buyers. For BTL landlords, it has imposed a three per cent stamp duty surcharge on additional properties and removed tax relief on mortgage interest for higher-rate taxpayers.
The PRA has also changed the rules for ‘portfolio landlords’ – those who own at least four properties – meaning they must present more information on their entire portfolio when applying for a BTL loan. And BTL mortgage lenders are subject to new stress tests.
However, the changes have not put off specialist mortgage lender – and former peer-to-peer platform – LendInvest, which recently unveiled a BTL product aimed at professional landlords, backed by funding from Citi.
And BTL-focused P2P lender Landbay has said that the more restrictive lending environment will benefit specialist lenders like itself.