Dilpreet Bhagrath

Four ways lenders can be more transparent with BTL assessments



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Recent tax changes and regulations introduced over the last few years have made it a confusing time to be a landlord.

While the changes in the new buy-to-let (BTL) tax system can be complicated, the changes haven’t yet impacted mortgage rates. Many landlords will still find owning a BTL property a great way to earn regular rental income, while also potentially benefiting from ongoing capital growth of the property.

With this in mind, landlords should think about creating a business plan when it comes to a BTL property. The plan should account for all tax implications, stamp duty charges and periods of vacancy at the property. Landlords should also seek advice from a professional tax adviser to understand how any tax and regulation changes might affect them.

We’d welcome lenders to have a more transparent approach with their BTL assessments to benefit the customer. There’s a number of ways in which they can achieve this.

  1. Review their current rental stress test

    There are two key parts to the rental stress test which lenders use to determine affordability for buy-to-let cases: the rate and the margin.
    The rate: Lenders calculate the monthly cost on a notional rate (for example 5.5%), even if this isn’t the rate the mortgage will be on, to make provision if interest rates go up.
    The margin: This is to ensure that the borrower has surplus cash flow from the property which would be used to cover additional costs, including service charges, repair costs and building a fund for rental voids.
    There’s currently a discrepancy between lenders in how they calculate the rate and margins for rental stress tests. Some are stricter than others, which often results in a 25% deposit not being enough to purchase a home due to reduced affordability. We’d like to see more consistency between the lenders to make the process more transparent for customers.
     
  2. More lenders allowing HMOs within their criteria

    Many landlords see the benefit of renting an investment property room by room to maximise income. HMOs can offer more security in some circumstances, as each tenant is on their own agreement. This means if a tenant were to leave, there’s still an income source from another tenant should they stay in the property. Lenders should become more willing to assess HMOs as it becomes a more popular method of letting properties.
     
  3. Commonsense approach with appealing valuations

    If there’s a down valuation on the anticipated rental amount of a property, borrowers should be able to appeal the valuation if they’re able to evidence a high rental yield through recent comparables of homes of a similar specification near the property. This should also be backed up by a letter of confirmation from an ARLA-registered letting agency.
     
  4. Mortgage monitoring

    Lenders should make landlords aware at least three months before their initial rate period ends, electronically and by post, to ensure they don’t fall on to an SVR accidentally and that they’re encouraged to switch at the right time.
     

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