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An article in the Telegraph suggests that many buy-to-let investors who bought their properties under old affordability rules may now find that they can't remortgage and that this puts them in the "BTL Danger Zone". New rules introduced by the PRA on January 1 this year restrict the amount that buy-to-let landlords can borrow.
But these rules will also potentially affect thousands of current buy-to-let landlords whose properties were bought before the PRA directives were brought in and who now want to remortgage as rents may not support current borrowings, when taking into account the new stress test at 5.5% at 145% coverage.Landlords looking to re-mortgage at the end of existing terms may have to make up the shortfall by putting in more cash. If they don't have this, they may have no other option but to sell up.But low BTL yields put landlords further into the "danger zone" as Section 24 starts to be implemented.Highly leveraged sole trader landlords will low yields may start to find that they are paying tax on a loss.To my mind, this is nothing new. Low yields have ALWAYS been a threat to landlord stability and portfolio sustainability, long before the advent of the PRA or Section 24.Focusing on positive net cashflow has always been the most sensible approach, rather than relying on low yields but high capital appreciation.You have to be in the game for a long time to benefit from capital appreciation, so cash flow is the lifeblood that sustains your business, until you reap the rewards of property price inflation.Cash flow is money in your pocket. Capital appreciation is nothing but speculation.Freehold houses will often provide a better yield than leasehold flats, when service charges and ground rents are taken into account.In this discussion - Why even 7% yield doesn't work on BTL - it was suggested that 7% yield did not make BTL feasible with the current financial and tax regimes.Many landlords, particularly in London and the South East, will have single occupancy properties historically yielding around the 5% mark.Long term low BOE base rate may have also lulled landlords into a false sense of security, many only surviving through the benign interest rate environment.There are a myriad of other factors that might put a landlord in the "danger zone", and individually these may not look like a problem, but when you add a lot of them together, there is a cumulative effect that might put a landlord in a perilous position.Along with yields of sub-5%, here is a tick list for landlords to understand if they are in the BLT "danger zone":1. High LTV - 85% plus.2. Property is in negative equity - i.e. mortgage is more than the property is currently valued at.3. Interest only mortgage with minimal term left and no repayment vehicle in place.4. Properties in need of refurbishment and upgrading, but landlord does not have funds to undertake the work.5. Rents in area stagnating or in decline.6. Voids increasing in your area.7. Other income streams you have are in decline.8. Being forced into a higher rate tax bracket through Section 24.9. You do not believe there will be house price inflation in your area in the next 5 years.10. You are already struggling to keep up with your mortgage payments.We put this check list together to help landlords be pro-active in securing the future of their property investments. Prevention is always much less costly and emotionally stressful than cure as you have far more control over the situation and outcomes.If you tick 6 or more of those boxes, it might be prudent to review your portfolio and work out a plan on how you can stabilise and future-proof it. This may involve selling under-performing properties, for instance and using any equity to pay down debt on others, or use the funds to refurb them up to a high standard.Risk mitigation actions:1. See 7 things to do while interest rates are low2. Our property debt management partner, Negative Equity UK, are on hand to conduct such a review for you, and you can have an initial chat no-obligation chat with them on 0161 631 2727 and they will advise you if they think they can assist you. Remember you can download our FREE Section 24 "Landlord Survival Guide" which we produced in association with Bamboo Auctions.The guide is a simple and easy to understand download.
CLICK HERE TO GET YOUR FREE SURVIVAL GUIDE SEE ALSO - Which property type offers the best potential for yield? UP NEXT - Understanding the impact of PRA on landlordsDON'T MISS - Spotlight on yield and cash flow - top resources to help you measure and manage!NOW WATCH:
I'd add to no 4 the compulsion to ensure rental properties are EPC compliant for continued legal letting.in the coming years.
I would like to add that the 145% at 5.5% is not an absolute "be all and end all". There are lenders out there who do not have this requirement. One lender will lend on a £ for £ basis at 125% of a stressed rate of 5.5% as long as their portfolio of other properties can satisfy 145% at 5.5%, or for a 5 year fixed rate, the same lender will lend at 125% of payrate at 3.95%.
The new regulations are a concern, but if you are struggling to find a lender to remortgage to, or are concerned about this subject in general and would like a free portfolio review by Property Tribes Financial Services, please contact us on 01206 654444.
Excellent article by Karen Bennett of Shawbrook Bank that adds to this topic:What opportunities and challenges lie ahead for landlords this year?