Buy to Let may come under more scrutiny post MMR

I can fully understand why people - especially the self-employed with variable annual incomes and the option to control their incomes by taking company dividends as and when they need the money, rather than in the form of a regular salary - will be tempted to buy a house using a BTL loan and then "rent" to themselves. The pernicketiness of these Fact Finds and monthly budget planners is simply unbelievable. They demand that individuals conform to a set pattern of income and expenditure which fit their lending criteria, when the fact is that most people, especially anyone running a business, experience wide variations over a year or a series of years and adapt their behaviour accordingly. For example, it is crazy that payments made to a savings account or SIPP are treated as fixed costs and permanent deductions from income, so reducing one's income multiple, even though common sense should tell us that if someone ever did experience financial difficulties or needed to respond to, say, an increase in interest rates, one of the easiest things they can do is stop making pension contributions and turn their savings payments towards paying current costs. Savings, pensions, holidays, new car payments and so on are not "commitments" but discretionary items that can be varied in a stress situation, so they should be irrelevant in calculations of affordability.

Also, when will mortgage providers ever learn to read company balance sheets? Their treatment of self-employed people and company directors is positively archaic and bears no relation at all to the behaviour of any business person I know. The mortgage providers are obsessed with "income", narrowly defined as salary, bonus and maybe dividends if you're lucky, even though most business owners seek to minimise their incomes for tax reasons, only taking just above the NI threshold and living off capital or occasionally taking dividends if they need the money, in order to keep their money working efficiently in the business. I've been told myself by a mortgage provider that to get a mortgage, I should take a fixed income - large enough for the size of mortgage I think I *might* want - every year out of the business, for at least three years, paying unnecessary tax and NI in the process, even though I promptly reinvest the residue straight back into the business as a Director's Loan. This just strikes me as crazy, especially if one day I'd like to seek a large new mortgage: to get one for, say, £350,000, it looks like I am expected to take an income of £100,000 from my business every year for three years, paying vast amounts of tax in the process, just in case I may want this kind of loan in future.

Rant over!

I hope buy to let mortgage lenders are forced to be more diligent. There is still some crazy lending criteria out there, e.g. stress testing based on 125% interest cover on discounted pay rates.

The average rental portfolio runs at around 30% of rental value being costs after factoring in all voids and expenses other then mortgage interest. 125% interest cover assumes the cost to be only 20%.

Given that interest rates can only go up, and especially where loans are stress tested at discounted rates, this is worse than irresponsible lending, it's suicidal.

PS Neil - interesting topic - and I don't care what everybody else thinks, I don't find the writing style of your articles THAT boring - YAWNS - 😉 LOL
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Reply to the comment left by "Tony Atkins" at "05/03/2014 - 15:05":

Hi Tony,

I agree things have changed a lot since I was working on the mortgage desk of a big bank in the 90s.

We used to look at Net Profit, Salary and dividends. We even had a special format to analyze company accounts.

Obviously a time long gone for the high street banks!

We obviously need to get lenders to look more closely at company accounts when assessing income as trying to get away with a BTL will do none of us any good.

PS Cheers Mark 🙂

I welcome stricter lending criteria! It was reckless lending that contributed towards the first credit crunch.

Hopefully, underwriting will return to a more personal service than "the computer says no".

The good thing about the challenger banks like Shawbrook, Aldermore, and Metro, is that they are treating people more like individuals and taking a view on individual circumstances.

I hope that a balance can be found and common sense lending should ensure that people do not get too much debt that they cannot sustain.

"Hope" isn't good enough, and the challenger banks mentioned by Vanessa are simply too small and lack visibility in the marketplace to supply demand adequately.

To illustrate the ludicrousness of the current practices, a small business person and company director of middle-class means might over three years take a basic salary of just £8000 in Year 1, for reasons of tax and NI efficiency, to leave her capital working inside the company, and because she has BTL investments that make her £30,000 a year and her husband has a salary of, say, £35,000, which together are easily sufficient to meet their needs and make substantial contributions to ISAs and personal pensions. In Year 2 the company makes a good profit, so she takes the same £8K salary, plus a dividend of £32,000 out of a potential £150,000, reinvesting the dividend back in the company as a Director's Loan because she again doesn't need the money. In Year 3 she takes the same salary and withdraws £200K out of her total £600K Director's Loan as a deposit for a house, rolling over the remaining (and any additional) dividend until the money is needed another year. Because mortgage providers require three years consistent "income" according to their definitions, her contribution towards the mortgage eligibility assessment would be a paltry £8000, despite ample evidence of the couple's continuing rental income, undrawn company dividends, and the ability to call on substantial capital sums if they ever found it difficult to cover the mortgage from their income.

This mania for salaried income and inability to deal with the financing needs of small business people and small companies is a significant reason why the UK is having such difficulty growing out of recession and improving its lamentable productivity.

Reply to the comment left by "Tony Atkins" at "06/03/2014 - 09:37":

Totally agree Tony,

The big banks work on ruthless cost benefit analysis. It is just not worth employing people that would understand and underwrite the above risk you are talking about at the same rates.

Regulation is also a limiting factor as all main residence loans are FCA regulated and the procedures, processes and cost involved in meeting regulatory requirements makes any low volume sales very expensive.

Quote: "I welcome stricter lending criteria! It was reckless lending that contributed towards the first credit crunch." Vanessa.

...Hmm, reckless lending...

This Subject REALLY annoys me !! - It's up to ME to make the payments, not someone else to decide if I have enough cash after I spend my money on cars, holidays, etc, or pay my mortgage amounts....

Do you think people take out loans knowing they do not have enough money to pay the loan and would go bankrupt ? ....I think not.

People have been forced into looking at all opportunities to plan for their future, due to the banks effing up pension schemes that people had paid into for decades, no-one can now rely on their pension pot.
People lost up to half of their income for the rest of their lives due to the banks:
We were conned into investing into pensions pots, where the people investing it for us was taking it out from the other side in the form of bonuses and huge salaries:
we've become smart to this and so their ponsi schemes collapsed.: so to punish us for not funding their incomes any more they slashed the annuities in half.

....People noticed !!!...

We now have to try to make our own "scheme", no matter what or how we try to do that:
So we will do everything we can to make that happen, if the rules are set up as obstacles, then we just learn to jump higher or tunnel under, or get round them.

...This, basically, is why so many people, investors, are trying to acquire BLT properties, it's one of the few, if not only, thing we can rely on to return any sort of reliable income, without other people interfering too much.
..this, on it's own pushes up house prices, without the added demand of FTBers, etc.

I have had to pay tax for three years now on accounts to show my NET income over a certain level, just so THEY can lend me money which I then PAY THEM for the privilege of borrowing...I am PAYING them for a product, should they disciminate by asking me all these intrusive questions?
Surely it's up to me if I feel I can afford to buy a product or not?
- This is why BTLs are not regulated - it's my business if I think I can afford it or not.

..I don't know of any other business where they ask what's your income, before they sell you something:
When I go into PC World they don't say, "do you earn more than £xx, or we can't sell you this printer!..if your income is too low, you won't be able to afford the ink cartridge refills and your printer will be useless to you!!"

Main Residences should be regulated.. to protect people from themselves!

RANT NOT over....to be continued !!

Reply to the comment left by "Jeremy Smith" at "07/03/2014 - 11:01":

I am waiting eagerly for part II 🙂

Unfortunately the responsible end up paying for the reckless and despite any hope to the contrary Banks are purely there to make profit for shareholders.

Jeremy,

Sorry but I don't think you should decide if you can afford the payments or not.

Because its not the payments that are the issue.

It's the running costs of a property.

Here are a few I am currently experiencing myself:

Voids £645.00 mortgage with no rent coming in.
A boiler repair of £480.00
Washing machine repair of £180.00
Delapidations of a property £500.00 - now taking guarantor to court to reclaim monies.
Fences blown down in wind £200.00
Water leak in property £90.00
Service charges on flats £600.00

That is just for the month of February.

That's why the analogy to PC World is not appropriate. If your printer goes wrong, it won't financially corrupt you and put the security at risk. And what about the tenant put at risk because the landlord cannot afford to maintain the property?

Property is a very attractive investment and there are plenty of people out there saying you don't need any money to get involved, but I do not see it that way.

BTL lending is based largely on the borrowing the rent will support, but the lender also wants to understand your financial position to ensure that you have robust enough finances to cope with the vagaries and financial curve balls of owning a property.

The whole sub prime market was based on lending to people who had no chance of maintaining the loan - they had already proved that which is why they were classed as "sub prime" - and when prices plummeted the folly of that came home to roost!

So that is why I welcome more sensible lending criteria.

Peer to peer lending is a new way for people to get decent returns on their money. Its taking the power away from the banks and making them less powerful, so you can take comfort in the fact that they no longer have a monopoly on the market and that products will become more freely available although borrowers will require a higher deposit.

Reply to the comment left by "Vanessa Warwick" at "07/03/2014 - 11:19":

George Orwell will think his 1984 has come to pass !!

I take offence at the statement: "Sorry but I don’t think you should decide if you can afford the payments or not."

As you say, it is a business, people should set up businesses with their eyes open, but if I am buying a product it is for me to decide if I can afford it.
I am fully aware of unexpected costs that can occur relating to house ownership.
What about cars? perhaps we need a financial health check to see if we can afford a car, in case it breaks down, or we have an accident ? - unexpected costs ??

Perhaps we should all have an annual financial health check, to make sure we are not spending money on things we shouldn't ! That we've bought the right car ? that we've not spent too much on the sofa ? That we are not going out too many times a week ?
--BIG !!****G BROTHER AT WORK.

The banks have created these national/international problems for every individual who hopes to have a half decent retirement, as explained earlier, and now they make us jump through hoops, and more hoops, for us to try to make this happen for ourselves.

- People will circumvent any measures put in place because we are not again going to blindly pay into THEIR ponsi schemes with promises of a happy retirement.

- DO WE ALL LOOK THAT STUPID ?