How the rules have changed for portfolio landlords and buy-to-let mortgages, and what landlords need to know
Three years ago, some major changes were implemented for buy-to-let landlords. Two stages were rolled out: New mortgages were subject to raised interest rates, and lenders were required to ask for much more information from portfolio landlords, to protect against the financial risks of being a landlord of multiple properties.
This looked like bad news for lenders and borrowers.
The changes came about in 2017 when a regulatory branch of the Bank of England, the Prudential Regulation Authority (PRA) investigated projections collected from mortgage lenders. They found that there were more buy-to-let landlords than the Bank of England had anticipated, and they were also concerned that these landlords tended to sell their properties when the economy took a downturn. The solution was to increase rent calculations, while the underwriting process became more complex and stringent. Lenders had to scrutinise portfolio landlords in terms of their business as a whole.
Buy-to-let landlord stress-testing
These new changes fell into two categories:
The first point sets out new calculations based on the projected rental income from properties. Landlords are now required to ensure the rent will cover 145% of the mortgage, at an interest rate of 5.5%. Lenders will look at the landlord’s ability to cover the rent and their ability to repay the interest rate.
Here’s an example:
A mortgage for a £200,000 property with a 5.5% interest rate brings the monthly interest rate on the mortgage to £1,329.
£200,000 x 5.5% = £11,000/12 months = £917 x 145% = £1,329.
So the minimum rent on a £200,000 property must be £1,329. Which means landlords buying properties in London and the South East may want to reconsider before applying for new mortgages. This is also reflected in recent figures that show the average price of a buy-to-let property between 2016 and 2018 was £183,278 for a buy-to-let, compared to £272,425 for a residential property.
In any case, it’s best to stick to the calculation using a 145% margin, because although the PRA inflicted a minimum of 125%, most lenders will apply the higher rate, or at least somewhere in between. This isn’t a bad thing: if the landlord doesn’t fulfil the criteria for borrowing, it probably means that the property isn’t going to be worth investing in, as it will have a meagre return or none at all. And this doesn’t factor in the additional costs of being a landlord, such as letting agent fees, void periods, maintenance, insurance, landlord license, income tax, gas and energy certificates, tenant acquisition, redecorating, furnishing, and any legal bills…to name a few.
Loan-to-value cap no longer valid
Previously, the loan-to-value (LTV) test was the only test that was applied when lenders decided on the amounts that could be borrowed. This is the ratio of mortgage to property value, and it’s applied to all mortgages. But under the PRA’s new rules, this wasn’t enough for buy-to-lets, and landlords can now only borrow the lower of the LTV cap, the average of which is currently 69% for buy-to-let borrowers and 82% for first-time-buyers. Essentially it protects the landlord against any problems that occur, such as difficulties collecting rent.
Most lenders will advise that the minimum down payment should be 25%; so if the borrower can provide a higher deposit this will work in their favour and the monthly repayments will be lower.
New rules for portfolio landlords
The PRA defines portfolio landlords as ‘borrowers with four or more distinct mortgaged buy-to-let properties, either together or separately, in aggregate’. These rules apply to mortgages for limited companies, holiday lets, and commercial or semi-commercial properties. These properties must be in the UK and they do not extend to properties owned outright. So if the landlord owns ten properties but only has existing mortgages on three, then they are not a portfolio landlord.
The second point requires portfolio landlords to submit more paperwork, and while it’s up to lenders to choose exactly what documents they want to see, it’s worth bearing in mind that they will likely want to assess the landlord’s business as a whole, by analysing papers such as:
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Bank statements
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Property investment experience
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Personal income and personal expenditure
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Business plans
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Tenancy agreements
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Cashflow forecasts
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HMRC tax records
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SA302s
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Assets and liabilities
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Total mortgages calculations across all properties
These are guidelines, so lenders could ask for more documents if they think they need them; or less if they assess suitability earlier. While this might sound like the route to taking out a new mortgage will be a lengthy one, landlords can prepare by getting their documents together earlier.
Before applying for a new mortgage, borrowers should make sure they have a good overview of their finances. Tax returns and accounts should be up to date, while credit reports and bank statements should be carefully monitored. If landlords prepare all the documents and spreadsheets outlined above in advance, the process will be quicker and easier for both borrower and lender, and more likely to result in a positive outcome. These preparations should be done months in advance of asking for a loan. Yes, it is a lot of information to gather, but it will give the landlord an idea of their suitability for borrowing and prepare them for any questions the lender might ask.
The good news is the tougher standards don’t apply to all landlords. The following are exempt from increased rates:
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Limited company borrowing
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Mortgages for commercial or semi-commercial property
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Holiday lets
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Bridging lending
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Mortgages with a fixed term of five years or more
The guidelines set out by the PRA also did not include mortgages that were taken out before January 2017, as long as there was no additional capital being raised.
The new rules are ultimately there for the landlord’s protection. Portfolio landlords are running a business, and so they are subject to the same kind of rigorous as other businesses.
Contact us now to discuss your personal options, Revolution Finance Brokers specialise in commercial and residential finance in Essex, Kent, London and Hertfordshire.
