Are You a BTL Mortgage Prisoner?

Are you a buy-to-let mortgage prisoner?

As the cost of living continues to bite and interest rates climb ever higher, landlords are finding themselves under an increasing amount of pressure when their current deals come to an end. Rising interest rates have impacted lenders’ affordability assessments, leaving a growing number of landlords as mortgage prisoners – trapped on a variable rate loan when their current fixed rate deal expires - because they cannot secure a new fixed rate deal. We take a look a closer look at what this means and what can be done to help those it affects.

The mortgage prisoner effect

Two main factors are driving this situation – interest rates and affordability:

• Interest rates

In 2016 when the Prudential Regulation Authority (PRA) launched their underwriting standards for buy-to-let mortgage contracts, interest rates were at a historical low. For example, a typical 5-year fixed rate was 3-4% compared to 6% today and most landlords took a 5-year fixed rate mortgage because it offered better rental affordability for the period. As these deals now come to an end, landlords are facing much higher mortgage interest payments than before.

• Affordability

Affordability for buy-to-let mortgages is typically assessed by looking at the Interest Coverage Ratio (ICR), a regulatory requirement set by the PRA. This is the ratio of gross rental income to mortgage interest payments. Typically, lenders will use a ratio of 125%x6% to determine affordability where 125% is the ICR  - this means that a borrower will have to demonstrate they will earn a rent of 125%x6% of the quoted repayments. 

If a current lender offers product transfers, then the impact may be mitigated but for those who don’t have this option, the outcome could be devastating.

It is of course possible for at least some of these extra costs to be passed on to tenants but with the current cost of living crisis, it may prove difficult, leaving many with a financial gap to bridge. 

Thinking creatively

So what can be done to help those landlords who find themselves in this position? A few lenders have already adopted niche ways of assessing rental affordability and there are a number of thoughts on how the loan could be calculated based on more than just the rental income from the property, for example:

• Pound-for-pound remortgages, without needing to assess rental income
• Top slicing (taking into account) landlords’ taxable income
• Top slicing (taking into account) landlords’ other properties in their portfolio
• Using the lower tax rate bracket of two or more applicants
• Using the market rent, not the rent received
• Using a capped-rate mortgage for 5 years
• Taking out a mortgage with a low fixed rate in year one, then stepped for a 5-year term
• Taking out a mortgage with a low fixed rate, and a large arrangement fee

At Vincent Burch Mortgage Services we believe that the PRA should change its calculations to reflect the current interest rate landscape and that a more creative approach is needed for the ICR, again to reflect the current situation more accurately. We are committed to working with the industry to help push forward innovative changes to help address the mortgage prisoner issue.

Mortgage finance solutions

To ensure you’re getting the best buy to let mortgage advice, particularly during these challenging times, always speak to an independent broker. At Vincent Burch Mortgage Services, our experienced, professional team will work closely with you to find a solution, tailored to your needs. Plus, you’ll benefit from access to specialist lenders who offer mortgage products and rates that are not available on the high street. This means better opportunities to improve your deal if you find yourself trapped in an unsuitable mortgage.

Find out how to free yourself from being a buy-to-let mortgage prisoner - call us today on 01603 851534 or email [email protected].

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