From the 30th of September 2017, the Prudential Regulation Authority will implement changes to the way buy-to-let mortgage applications are assessed for portfolio landlords.
It seems that the Government and financial regulatory authorities are not prepared to forgive and forget that careless mortgage lending played a significant part in 2008 global financial crisis. Tougher mortgage assessments have already been implemented for private residential property owners and now it’s the turn of portfolio landlords.
Portfolio landlords are defined as having four or more distinct mortgaged buy-to-let properties, either together or separately, in aggregate. They are currently assessed for a buy-to-let mortgage based on the rental income and property value of the property they are applying for. Lenders may limit the number of buy-to-let mortgages that can be taken out with them but don’t concern themselves with mortgages a landlord may have with other lenders. So buy-to-let portfolio landlords have always been able to mix and match to get the best deal, and spread outgoings across their portfolios as standard practice. For example, the majority of their buy-to-lets are profitable then they cover any shortfalls on the ones that aren’t. For buy-to-let landlords, the business has always been about finding the balance between outgoings and profit.
In recent years, that business has experienced a few hurdles however. The Wear and Tear tax allowance has been removed; an additional 3% Stamp duty is now charged on second or more property purchases; from April this year, tax relief has begun its tapering descent from 40% to 20% by 2020; and now, for any buy-to-let mortgage application, lenders will have to assess the value and risk of the whole portfolio.
Yes, the whole portfolio. Lenders will have to work out the amount of aggregated debt, the cash flow and associated costs from multiple properties alongside the risks from the property itself. What’s more, they will assess the landlord’s history in the business to work out their risk.
Depending on the lender’s comfort levels, their decision to lend will be based on a landlord’s property investment experience, total borrowing across all properties, assets and liabilities (including tax obligations), total income and whether the new application will add to or detract value from portfolio. Landlords are advised to keep an up-to-date property portfolio spreadsheet, business plan and cash flow forecasts, the past three months’ bank statements, SA302s, tax return documents and tenancy agreements handy.
In addition, lenders will apply a stress test to the loan based on a landlord’s ability to pay should the interest rate rise above 5.5% (between 4% to 5.5% on 5 year fixed rates) and only once the affordability criteria has been met will a lender consider the mortgage based on whether the property’s projected rental value would equal 145% of the monthly mortgage payment. Plus the whole process will need to be repeated for every new mortgage application or refinancing. The fallout from the 2008 financial crisis is still being felt and all this is to make sure that lending is responsible.
For lenders, it goes without saying that the volume of paperwork will increase exponentially and for some, buy-to-let mortgage products will become more trouble than they are worth. So are landlords facing a dreary future of paperwork, more expensive mortgages with fewer product options? Perhaps, but the likelihood is most lenders will “up-skill their underwriters” while other specialist buy-to-lenders will simply diversify their products to take into account the changes. It also will make brokers more important than ever.
Julian Sampson, Partner (Lending and Real Estate) at TWM Solicitors, also advises: “What has become apparent since the PRA announcement is that lenders have been waiting on each other to release details on how they are treating portfolio borrowers. This, in turn, has knocked onto the intermediary community.
“Those most capable of assisting in such short notice have been those with the internal capacity to assess each lender’s requirements in short measure, which means turning to specialists rather than dabblers will be the most important outcome.
“Landlords should already be able to identify their weakest assets, and the PRA changes will mean underwriting in the round will not be achievable. Therefore, Landlords should look at their leverage positions generally, and work to even their collateralisation as best possible.”
Brokers could end up being the buy-to-let saviours. Advising portfolio landlords on what information needs to be submitted, what products on the market best suit their needs (including a wide selection of specialist lenders often with preferential rates based on their business relationship with the broker), experience navigating the waters of complex buy-to-let finance and whether listing the business as a limited company is worth considering for tax purposes.
Sampson adds: “The macro-economic situation in the United Kingdom means that buy-to-let remains a vibrant market, and whilst it will suffer its fears alongside other areas, it will remain a strong stable market for those Landlords who control leverage, act professionally and keep abreast of legislative changes such as the Energy Act impact on EPC’s next year. Buy-to-let will continue to see new lending entrants and growth in 2017, and so they clearly foresee this is an area worthy of their funds.”
Vidhur Mehra, Finance Director at Benham & Reeves Residential Lettings advocates making sure your “house is in order”. This means ensuring that the information you need regarding your properties is up to date, organised and readily available. Vidhur insists this will be invaluable in assessing any impact of the changes.
We also asked Vidhur what’s the most significant change on buy to let mortgage changes for portfolio landlords? And in this case how should landlords approach it?
- Regulations: whilst sometimes onerous, they are there for protection which is beneficial to the market overall.
- Excessive borrowing can become a problem. The stress tests will become an important consideration.
- Using debt finance is sensible but plan ahead and don’t over-leverage
In the uncertainty of September’s changes, this advice and support will be invaluable. Matching the portfolio landlord and their mortgage requirement with the right lender will make a huge difference in terms of time, effort and cost. So why not make an appointment to talk through your buy-to-let borrowing options with Visionary Finance today?
Updated: 11th October 2017