Pay rate BTL mortgages - Understanding the consequences

05 May 2016

Simon Bayley, Commercial Director at Foundation Home Loans, asks whether with some BTL lenders continuing to offer pay rate products on fixed or lifetime trackers, are we potentially creating the next affordability bubble?

Simon Bayley said, “Brokers must appreciate the potential consequences of recommending a pay rate BTL mortgage product today to landlord clients in light of the expected changes from the PRA’s March proposals. Lifetime trackers or shorter term fixed products on a pay rate basis can be proposed to maximise the loan amount or to fit on affordability. However, when landlords come to refinancing they will have to fulfil the PRA criteria of a minimum stress rate of 5.5% not taking into account any future interest rate increases, which could leave them as “mortgage prisoners” and unable to refinance away from their current lender.

He continued, “On the face of it, recommending a pay rate mortgage makes sense to landlords who want to maximise the amount they are able to borrow because lenders can still use the pay rate in the calculation. However, when we go forward in time and landlords wish to refinance, they will find that instead of using pay rate, they must now face a stress test at a minimum of 5.50%, which could very well make any chance of refinancing impossible.

If the PRA confirms its willingness to adopt the proposals made in March, advisers will need to ensure that they have discussed the implications of pay rate mortgages with their clients. Making sure they are fully aware of how pay rate mortgages might be attractive at outset because of the uplift they provide, but how they could leave the landlord stranded further down the line, will be vital in terms of offering the right advice. Further consideration should also be given to an eventual increase in interest rates and the effect that might have on the yields of those landlords unable to refinance and stuck on a lender’s SVR with nowhere to go.”