From the 1st of October, the way mortgages are assessed for portfolio landlords will change. The Prudential Regulation Authority has set out a series of rules for “responsible lending” to landlords with four or more distinct mortgaged buy-to-let properties.
Currently a buy-to-let landlord need only supply details of the expected rental income and the value of the property to secure a mortgage. In some cases, the fact that they already hold several buy-to-let mortgages with the same lender is enough for the lender to agree to a new loan. And while lenders may have limited the number of mortgages one landlord could take out with them, they’ve never concerned themselves with other mortgages the landlord may have elsewhere. Portfolio landlords have regularly mixed and matched their mortgage products with different lenders to get the best deal and been left to their own devices to find the balance between outgoings and profit across their portfolios.
It’s understandable then, that the Prudential Regulation Authority feels that the current system of buy-to-let mortgage lending is haphazard to say the least. If any lessons have been learned from the 2008 financial crisis it is that lending needs to be more tightly controlled and that lenders should have a flawless paper trail to keep them in check. So, lenders will now have to assess the risk and value of the landlord’s entire portfolio before making any mortgage decisions.
Depending on the lender’s comfort levels, their decision will be based on a landlord’s property investment experience, amount of aggregated debt across all properties and other mortgages, assets and liabilities (including tax obligations), total income, outgoings and cash flow as well as whether the new application will add to or detract value from portfolio. Once they are satisfied with the solvency of the landlord, lenders are obligated to apply a ‘stress test’ to the loan based on the interest rate rising above 5.5% and the a landlord’s ability to pay in that event. Then, and only then, will a lender consider the mortgage based on whether the property’s projected rental value would equal 145% of the monthly mortgage payment. This whole process will have to be completed every time there is a new mortgage application.
Lenders are already groaning under the weight of the paperwork needed for the new assessments and many could decide that lending to portfolio landlords is not for them. For specialist lenders though, the bedding-in period is likely to be uncomfortable but there is also an opportunity to lead what could become a niche market. Brokers too will find the initial stages difficult but, if they keep their wits about them, it could be their opportunity to shine, smoothing the way for lenders and the landlords.
Landlords need not be passive while the financial authorities decide their fate. By keeping an up-to-date portfolio spreadsheet, business plan and cash flow forecasts, the past three months’ bank statements, SA302s, tax return documents and tenancy agreements for each property they can save the brokers and lenders some dreary leg work. Ultimately, the PRA is there to help them by making sure the lenders are acting responsibly. The new rules ensure that landlords don’t overstretch themselves and aren’t taking financial risks that could have a knock on effect in the housing market. And that’s good news for everyone.
If you would like property advice, whether it is residential or buy-to-let, get in touch with Absolute Property today.