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COCKTAIL OF REGULATION AND INNOVATION DRIVES SECOND CHARGE BTL SURGE

By Bradley Moore

A growing number of clients are using second charge buy-to-let mortgages as new restrictions for landlord loans start to bite. We have seen a noticeable increase in the demand for second charges this year since tougher rental calculations were imposed by the Prudential Regulation Authority (PRA). Many borrowers are finding they are unable to raise the required additional capital with first charge lenders and are now turning to second charge lenders for their help.

From 1 January, the PRA has imposed loan to income limits on regulated mortgage contracts. It follows the Mortgage Credit Directive rules that LTI limits would automatically apply to second and subsequent charge mortgage contracts, which are currently exempt. In June 2014, the PRA and FCA said lenders with more than £100m annual mortgage loans should not hold more than 15% of their mortgage book with loans at LTI of greater than 4.5. The aim is clearly to reduce wider risks to PRA and FCA-regulated lenders from high LTI mortgage lending being carried out. The primary purpose of the recommendation is to constrain excessive levels of household indebtedness which could, result in instability following a shock and so in turn threaten the safety and soundness of firms.

While the macro economics are straightforward, it is already having a practical effect on how landlords access finance. For example, the PRA rental calculations also assess tax liabilities of borrowers and examine which tax brackets are applicable. It means some calculations will be as high as 160%. The 160% level is for additional rate tax payers, higher rate tax payers are calculated at 145% and basic rate tax payers at 125%.

However, the vast majority of first charge lenders have now adopted a one size fits all approach where Income Contingent Repayment is calculated at 145% at a stress rate of 5.5% of the desired first charge. There are certain areas where this can work perfectly well and clients can take out an appropriate first charge mortgage. But that is unusual and this scenario will likely mean turning to the support of a specialist second charge mortgage to raise funds for your clients.

There can be more success through second charge lenders. Some do not fall under the guidance of the PRA changes and can still work on a 115% rental calculation. And for those second charge lenders that are regulated, there is an ever-growing need for product innovation to keep pace with borrower demand. Fortunately, this is changing and certain lenders will now allow the use of a client’s personal income to supplement any shortfall in the rental cover calculations to facilitate further borrowing. It is a potent cocktail of regulatory changes and product innovation from second charge lenders that is making second charge loans a great solution to raise additional funds against your property. Many brokers are happy to refer their clients to Master Brokers such as Brightstar.