The Next Transition for Buy to Let

With the PRA changes casting a dark shadow over the rental market, we’ve asked both high street and specialist lenders to give their views on how we can expect the market to adapt and recover over the next few years.

Crucially we want to help brokers to understand lender’s agenda in this field and the changes they can expect to see in their day-to-day business.

How will the rental market change over the next three years?

Louisa Sedgwick, Vida Homeloans: As the tax changes are phased in over the next three years, undoubtedly we will see a transition from small amateur landlords, whose buy to let property no longer works for them as an investment, into larger professional landlords, who are likely to look to grow their portfolios and could look for a different proposition, buying new properties within a limited company. Naturally some amateur landlords who are low rate tax payers, or who have bought for capital appreciation as opposed to rental yields, will still be around.

Terry Jordan, RBSIP: The rental market has been subject to a myriad of changes with the introduction of the 3% stamp duty levy, scrapping of 10% “wear and tear” tax relief, phasing out of mortgage tax relief and introduction of more robust lender requirements.

This will have made many buy to let landlords reassess their position; review their rental yields and the size of their portfolios.

This year we have seen a marked reduction in buy to let transactions as the impact of these changes works its way through the market.

Longer term, however, the rental sector will still be seen as an attractive option when considered against general uncertainty in the economy, record low savings rate and stock market volatility.

Demand for rental properties should remain strong as house prices rise, real income levels fall and inflation rises, limiting the ability of people to take the step onto the housing ladder. The fundamental impact of supply and demand strongly supports a continuing rental market.

Phil Riches, Keystone Property Finance: The sector is definitely moving onto a more corporate and professional footing which, despite stricter underwriting guidelines, has presented an opportunity for portfolio landlords to grow their businesses. But they will need to watch out for the larger corporations which are moving into the sector. I think we’ll see fewer small investors enter the market. The changes to income tax relief have made buy to let less attractive than it was to individuals who might previously have thought of the sector as an alternative pension strategy.

Ross Turrell, Fleet Mortgages: We expect the private rental sector to remain stable over the next three years, however, demand for affordable accommodation is increasing, with the age group 25 -35 staying in shared houses longer. Families are looking for security of tenure and so 36 month tenancies are becoming more common.

Do you think landlords will look to diversify their portfolios in the future to increase their profits?

Louisa Sedgwick, Vida Homeloans: Landlords may choose to look at HMOs, MUBs or student lets, however they will need to tread carefully and ensure they understand all the regulatory requirements that need to be met. Quality over quantity is definitely important.

Terry Jordan, RBSIP: Diversification of portfolio is a common practise amongst investors looking to maximise their returns and particularly if their returns are under pressure.

Within a property portfolio opportunities arise to diversify include number or type of property held, residential versus commercial or semi-commercial usage, houses in multiple occupation, student lets and geographical dispersion.

Landlords with larger portfolios are more likely to have the opportunity and benefit from diversity but similar to investment portfolio’s this is likely to be influenced by the landlord’s risk tolerance, length of time the landlord expects to hold their portfolio and amount invested.

Phil Riches, Keystone Property Finance: Definitely. This is happening already. Investing in HMOs and blocks of flats (known as multi-units) is becoming increasingly popular for experienced landlords because of the higher yields on offer. Mixed use properties too, e.g. a shop with flats above, are also growing in popularity and are often a first step to moving into commercial property investment.

Ross Turrell, Fleet Mortgages: Landlords facing increased costs, with taxation and regulation, are looking to increase yields to restore profitability. HMO’s and shared accommodation are increasing in popularity, along with a willingness to diversify with regional spread.

What will lenders do to support first time landlords who are looking to invest in the UK property market?

Louisa Sedgwick, Vida Homeloans: Lenders will continue to support these borrowers/landlords as they do today. Whilst different lenders will stress their rates differently, mortgages are still very much available for first time landlords, in fact Vida lends to first time buyers who are first time landlords too.

Terry Jordan, RBSIP: Not all lenders support first time landlords where by definition, the landlord lacks experience in managing rental properties.

At RBS we continue to support this market and are looking to work in close collaboration with the borrower to identify any potential issues i.e. landlord insurance, management of property, gaps in tenancy, other costs to ensure they enter into any agreement with eyes wide open.

Phil Riches, Keystone Property Finance: Buy to let lenders, particularly those in the mainstream, have always supported first-time landlords. If anything, I think they will be even more keen to attract this business in an effort to support their lending volumes.

Ross Turrell, Fleet Mortgages: With the current economic uncertainty, we are seeing less new entrants into the buy to let market, with this group preferring to ‘sit tight’ for the time being.

Have you seen an increase in the percentage of landlords adopting a limited company structure? What are the long-term advantages and disadvantages of doing this?

Louisa Sedgwick, Vida Homeloans: Any increase is in new purchases as opposed to refinancing, largely due to the cost implications of moving a property from sole ownership into a limited company.

Terry Jordan, RBSIP: Due to the recent loss of tax relief the suggestion has been that transferring to a limited company structure generates certain tax advantages, as all expenses can be written off for tax purposes. This is particularly re-enforced for landlords with over four properties.

However, transferring to a limited company status also carries with it other higher costs, for example, mortgage costs, different property taxes and different ongoing costs.

The reality is that the landlord with a larger portfolio might find tax benefits outweigh higher mortgage costs but this might not hold in all situations. The landlord should always seek advice as to their own individual circumstances.

Phil Riches, Keystone Property Finance: Most definitely. Here at Keystone, 70% of mortgage applications for buy to let purchases are now made by landlords using corporate structures – predominantly Special Purpose Vehicle (SPV) limited companies, although we are one of the few lenders that will also accept trading limited company businesses too.

Increasingly remortgage activity is also being made by landlords using limited companies too. For many landlords, incorporation is a more efficient way of running their portfolios. However, it’s not right for everyone and we always ask our clients to seek professional advice to ensure that they have the right borrowing structure for their circumstances and ambitions.

Ross Turrell, Fleet Mortgages: For purchase business we have had an uplift in our limited company proposition since the taxation changes, however it is important that good tax advice is taken as there are many implications depending on current and future circumstances.

Will lenders begin to reduce rates and fees on limited company products to bring them in line with standard buy to let mortgage products?

Louisa Sedgwick, Vida Homeloans: Most lenders do already – the cost of limited company products is largely the same as standard buy to let products.

Terry Jordan, RBSIP: As the buy to let market continues to develop and the impact of recent changes plays out in the market, the effect between private and limited company status will be subject to internal credit risk review.

The assumption is that a company/commercial structure carries with it additional risks that are reflected in higher rates and fees but this will continually be assessed to establish risk to the lender and fairness to the customer.

Phil Riches, Keystone Property Finance: For the most part, where a lender accepts applications from limited companies, the companies have access to the same standard buy to let mortgage products as individual applicants. Unfortunately, some mainstream buy to let lenders will not lend to limited companies at all which means that some of the very cheapest rates are not available to corporates. Keystone offers the same rates to individuals, SPVs and trading limited companies.

Ross Turrell, Fleet Mortgages: As more lenders entered the limited company space, rates became more competitive. However the limited liability structure of these loans makes it slightly more expensive to originate, underwrite and fund, therefore a premium is charged.

How will you treat portfolio landlords following the PRA changes?

Louisa Sedgwick, Vida Homeloans: There will be very little difference between pre and post PRA for Vida. We may ask for a little more paperwork, however nothing too onerous for the broker and landlord.

Terry Jordan, RBSIP: From Q4 2017 we will be introducing the following –

We will increase the total number of buy-to-let properties we will allow a landlord to own from four to 10 rented properties. This total will include unencumbered properties and those mortgaged with another lender.

The maximum aggregate customer borrowing allowed will be increased to £3.5m, up from £2m.

The current £50,000 minimum income for aggregated borrowing over £1m will be removed.

Finally, all customers will be required to meet our standard buy to let minimum income of £25,000.

Phil Riches, Keystone Property Finance: Keystone has a new policy to comply with the PRA guidelines. Essentially, landlords’ entire portfolios will be stressed to ensure they work at 125% @ 5.5%, regardless of whether the new application has been made in the name of an individual or limited company. We will also require each property to have 100% rental cover and portfolios geared above 80% will not be considered.

Ross Turrell, Fleet Mortgages: We have extensive experience in this sector, with 56% of our customers having four or more buy to let mortgages. We’ve adopted a ‘back to basics’ approach, built on simplicity.

What additional documentation will you require on cases for portfolio landlords?

Louisa Sedgwick, Vida Homeloans: We already ask for a schedule of properties. We will be asking for a very basic business plan and where a portfolio is deemed complex, our Underwriters may ask for additional comfort to allow them to make an offer on a mortgage.

Terry Jordan, RBSIP: For all applicants, we will require the individual to provide details of each property a customer owns.

Specifically, for portfolio landlords (those owning four or more properties), we require additional information about their existing buy to let and rented properties, their landlord experience, use of letting agents and future portfolio plans

Phil Riches, Keystone Property Finance: We will require them to provide a detailed, up-to-date spreadsheet of their entire property portfolio. We won’t ask for a business plan or cash flow forecasts in the first instance, although these may be required to support more complex applications.

Ross Turrell, Fleet Mortgages: No additional documentation is required, advisers only need to complete an application form and a property asset and liability statement.

Will you introduce any additional support to help brokers cope with the increased workload and requirements?

Louisa Sedgwick, Vida Homeloans: We will be asking the brokers for very little in addition to pre PRA, however we have said that should we need any additional information, we will work closely with the brokers to allow them to upload the documentation in whatever guise, providing it fulfils our requirements.

Terry Jordan, RBSIP: We will be introducing our new buy to let calculator hosted on our website which will make it easier to assess the customers’ affordability.

We will also be supporting the application process with a new valuation service to assess rental demand and rental income for all other properties being let, with the results used to validate customer affordability.

We have also undertaken extensive training internally to familiarise our staff with these changes and therefore be able to fully support you through the application process.

Phil Riches, Keystone Property Finance: In recognition of the bigger workload, we have increased the proc fee paid to brokers by 10 basis points on all Classic Range cases.

Portfolio spreadsheets can be submitted to us in a standard format – we will not ask brokers to key in every property to an online application submission system.

We will also be releasing a tool which will enable brokers to convert the spreadsheets into the format required by Keystone. It has always been our aim to try and keep this process as simple as possible, so we hope this tool will be welcomed by both brokers and landlords – it will certainly save brokers many hours of additional admin.

Then if a portfolio passes the initial rules, Keystone will use an automated valuation model to verify a landlord’s valuation and rental figures. This will help to keep turnaround times on track.

Ross Turrell, Fleet Mortgages: Portfolio lending with Fleet Mortgages will continue to be straightforward, if your customer doesn’t have a ‘Property Asset & Liability Statement’, then you can use ours from the website.


Some amateur landlords with small portfolios may decide to sell up due to the taxation changes, stricter affordability calculations on buy to let mortgages and increased requirements from the lender. This, in turn, should free up more properties to enable first-time buyers to take their first step onto the property ladder.

There will still be strong support for first-time landlords, though, from both the high street and specialist lenders. In particular, lower rate taxpayers and those who are mainly interested in capital appreciation, as opposed to rental yields, may still find property a rewarding investment.

Overall, there has been an increase in the number of landlords adopting a limited company structure but Mortgage Advisers should recommend that customers seek professional advice before making this decision as their future intentions will be an important factor to consider.

Lenders are making every effort to ensure the PRA changes can be adopted as simply as possible. With many lenders introducing document templates, tools and support teams, to help brokers transition to the new era of buy to let.

Ingard’s Specialist Team will be here to guide brokers through these changes. If you would like advice on a case or additional training, then please call us on 01702 538 800 or email