Brokers needed more than ever to navigate buy-to-let affordability

Brokers are crucial when it comes to helping borrowers navigate the challenges of affordability and criteria.

In our latest Spotlight session Alex Witham, Regional Account Manager, was joined by intermediaries of all sizes and experience from across the country. He discussed stress testing, affordability requirements and the growth of SPVs (special purpose vehicles). As lenders look to support borrowers in a high interest rate environment, Alex also explored the changing role of product fees to help brokers maximise borrowing potential.

Affordability changes

Alex explained how affordability has developed in recent years. Before 2017, lenders would typically calculate affordability with a widely used ICR of 125% at a 5% interest rate. With no regulatory requirement for lenders to stress background portfolios, brokers could have clients with large portfolios that were ‘ringfenced’ by a majority of lenders.

However, the announcement of the tax reforms of Section 24 in the 2015 budget and concerns about rate rises pushed the PRA to introduce its supervisory statement with new guidelines and tougher stress testing. As Alex explained, larger landlords tried to get ahead of the curve, creating a surge in activity. He argued it could be a large contributor to why both lenders and brokers have seen increased demand for refinancing over the last year, as landlords come to the end of fixed rates and re-evaluate their portfolios in a higher interest rate market.  

Today, each lender has their own individual rules, criteria and appetite to risk, creating a vastly different environment. Background portfolios are now checked for affordability, as well as some lenders checking income, savings, assets and other liabilities. Plus, ICRs also now vary on tax status, as lenders consider the costs of high-rate taxpayers with the loss of tax-deductible expenditure.

The meteoric rise of SPVs

With higher-rate taxpayers now stress tested at up to 145% (140% here at Landbay), many clients have leaned on special purpose vehicles (SPVs) for greater affordability. Through limited companies, Alex explained borrowers can still offset mortgage interest and costs, but also keep the 125% rental calculation. If a broker has wealthy clients looking to secure buy-to-let properties, this could be a more affordable option.

Using the latest data, Alex showed that this has helped fuel the expansion of SPVs. While it was a steady incremental growth between 2007 and 2014, the changing tax regime caused SPVs to skyrocket. He explained that in 2021, more than 47,000 SPVs were set up – almost double that in 2017 and a tenfold increase in 2007. It has continued to grow too with more than 48,000 in 2022.

For those brokers on the session that didn’t do much limited company buy-to-let, Alex said it was only a matter of time, especially with the increase in SPVs in recent years.

Increasing borrowing capacity

To ensure viability in a higher rate environment, Alex explained that most lenders have increased fees to achieve products and rates that still work for clients. Using our variable fee structure as an example, Alex explained we have 17 different five-year fixed rate products to suit all client requirements with fees ranging from £1,495 to 7%.

Alex said the structure is cost neutral and designed to help brokers achieve a lower interest rate and increase the borrowing capacity of their clients. While it may not suit all, it offers a strong option if the motivation is borrowing potential.

But as Alex explained, stricter stress tests in response to high interest rates, as well as varying portfolio criteria and both income and deposit requirements are creating real affordability challenges for some landlords. He said it is much more difficult now to navigate the buy-to-let arena as a landlord. While going direct to lender is an option, brokers are definitely worth their weight in gold to navigate affordability and the nuances of criteria.

If you would like to understand more about our products or discuss a case, please get in touch with your local BDM.