Tougher buy-to-let mortgage rules hit this month

Buy-to-let mortgage lenders will look at whole portfolio

From 30th September 2017, landlords who are applying for a buy-to-let mortgage will need to provide much greater detail about the other properties in their portfolio, as part of their application.

These new financial regulations have come from The Bank of England’s Prudential Regulation Authority and require landlords with four or more mortgaged properties to prove they are not financially over-committed, when applying for a new mortgage.

This means that lenders now need to consider a landlord’s total portfolio,when making their decision to underwrite the mortgage.

Earlier in the year, as part one of these new rules on underwriting buy-to-let mortgages, lenders began applying a new ‘stress test’. This checks that borrowers can afford to pay mortgages at the hypothetical rate of 5.5% interest.

The new lending rules mean that monthly income from rent would need to cover 125-145% of mortgage interest, even with an interest rate of 5.5%.

This would be based on the landlord’s whole portfolio of buy-to-let properties. While landlords who are remortgaging but not raising capital, should be able to secure money at rent covering 125% of interest.

An interesting aside is that, as the regulatory conditions seek to objurgate and chasten landlords, some lenders are implementing a swing upwards in the buy-to-let mortgage rates.

Portfolio landlords

The new regulations focus on so-called ‘portfolio landlords’, who have four or more buy-to-let properties. The regulations only take into account properties with existing mortgages. This means if you have five properties, but only three of them are mortgaged, the new regulations will not apply.

More detail required!

If you fall into the new cadre of portfolio landlord, lenders will now take into account the financial health and viability of your whole portfolio, in order to make decisions on single property applications.

The additional information lenders could ask for includes:

• Current experience in property investment
• Total amount borrowed across all mortgaged buy to let properties
• Total income generated from rental property
• Alternative sources of income
• Historical and future cash flow
• Assets and liabilities, including any tax liability

Some lenders have stated that they will also ask for a business plan, as part of the application.

This means that you should be prepared to support any new mortgage application with bank statements, tax returns, a spreadsheet listing your complete property portfolio, cash flow forecasts, a business plan and income and expenditure statements for your portfolio.

The lenders react

The guidelines, published by the Prudential Regulation Authority, say that the lenders should take “a proportionate approach, based on their knowledge of the borrower, their portfolio and alternative sources of income they have”.

While many lenders are reacting slowly, those that have are showing a diverse range of reactions. These swing from requiring face-to-face meetings and extensive documentation to a seeming total lock down on all buy-to-let mortgage lending.

Here is how some of lenders have responded.

Mortgage provider Paragon says that it changed its underwriting criteria in July, so it will need very few changes to implement the new standards.

Nationwide’s buy-to-let arm, The Mortgage Works, says it will run a full affordability assessment. Their new requirements are particularly hard on borrowing for houses of multiple occupation (HMO), where they would expect to see rent covering mortgage interest by either 145% or 170%.

This is particularly significant for student property, as the majority of house are HMOs.

They will also lean towards requiring the maximum of documentation from applicants. This would include a business plan outlining future plans, as well as proof of income and an asset and liability statement for the whole portfolio.

At the other end of the scale, Santander have decided to restrict lending to like-for-like remortgages only. This means they’re shutting their doors to landlords looking to buy new properties or raise funds on their existing ones.

Meanwhile, Aldermore Bank is taking a more nuanced approach – further dividing the portfolio landlord market in two. Investors with up to ten mortgaged buy-to-let properties will need to provide a portfolio schedule and business plan, alongside their usual documentation. For landlords with portfolios of eleven or more, the bank will ask them to a face-to-face interview. While the extra documentation they need will be increased to also include a 12-month cash-flow forecast and an asset and liability statement.

Finally, Accord Mortgages will base its lender decisions on a landlord’s experience, their full portfolio – including any outstanding mortgages – and their assets and liabilities. Collectively, the properties in the portfolio would need to meet 135% of interest, based on 5% interest rate.

In an already small buy-to-let market, this does open the very real possibility that there will be fewer lenders. In fact, your current lender might not underwrite mortgages on future properties.

The different interpretations the lenders are bringing also means that applying to a lender could be problematic. Arron Strutt, a broker at Trinity Financial, discussing the issue with the Financial Times, noted:

“All of the lenders seem to have different criteria. They interpret the rules in different ways. You might qualify with one bank and not the next.”

Disadvantages of the new buy-to-let mortgage rules

The culminating effect of all the recent changes to landlords’ finances, such as tax changes and stamp duty, means it’s hard not to view this as a punitive measure designed to drive landlords out of the market. After all, that’s what the stated aim was.

As always, the riposte is always that it will be tenants who lose out, as landlords adjust the rent they ask to cover these additional costs of doing business.

The student rental market always stands slightly aloof to these concerns, in that it creates higher yields and experiences a regular yearly churn. However, it does have a larger percentage of businesses who will qualify as ‘portfolio landlords’.

One of the predictions is that as the new underwriting rules are applied, there will be a larger stock of rental properties on the market.  With the larger portion of portfolio landlords in the student market, this risks a scenario of lots of people selling but very few buying.

The fact that the lenders each have different ideas about how to administrate the changes, means that borrowers and their brokers face an uncertain time.

Many commentators have pointed out that landlords with low-performing properties in their portfolios might find these affecting their ability to borrow.

A Broker from John Charcol, Ray Boulger, says:

“The rules say the whole portfolio must be viable. Let’s say you have ten properties and eight are generating rental income in excess of mortgage payments and the other two are not, but the shortfall is covered by the other eight. Is that going to be acceptable? For some lenders it will be, for others it might not be.”

Alongside the practicalities of having a longer wait for your application to be assessed, there is the prospect that the new rules could see lenders assessing landlords’ current mortgages against the new 145% x 5.5% ratio. This despite the fact that these mortgages would have been granted under much more favourable circumstances.

Benefits of the new buy-to-let mortgage rules

As with all changes to regulations, initial reactions often see people drag out their ‘end is nigh’ sandwich boards. While an increasing amount of regulation does not make life easier, the property market is nimble and will adjust.

While the wonderfully named ‘dinner party landlords’ may struggle to bring their paperwork up to a standard that the new regulations require, the student market has always attracted more clued in investors.

The unique requirements of the student market, means that it attracts more experienced landlords. This means that you’re more than likely to have already much of the paperwork that the lenders require.

While the application process may be slower, this will probably mean more work for the brokers, rather than for you.

This is an excellent opportunity to clarify your plans for your portfolio. Chris Norris, head of policy at the National Landlords Association, while pessimistic about the regulator’s attitude to landlords, mentions that:

“One of the complaints we get from landlords is that the rest of their portfolio is not taken into account. In some cases, it could assist them remortgaging.”

In fact, it would help a mortgage application for a property that currently had a lower return on investment, if it was set against a healthy portfolio.

The new rules do not effect limited companies, but as always there are disadvantages to converting to company status, just as there are benefits. So, as always we recommend getting advice before committing, which will suit long-term investors.

In the short-term, the market for buy-to-let mortgages may be suffering from spasms, as it adjusts to the new regulatory landscape. However, new rules don’t make the market simply disappear. As the world adjusts and normalises, it is highly likely that lenders will create or readjust their products to fit the new market.

As always, if you have questions about investment properties, I am more than happy to speak to you about the student property market in Birmingham, Bristol and Nottingham. Email me at Stephen.Haigh@purplefrogproperty.com. Or, ask for more information on our landlords page.

Further reading

http://www.bankofengland.co.uk/publications/Pages/news/2016/073.aspx
http://www.bankofengland.co.uk/statistics/Documents/articles/2016/17sep.pdf
http://www.bankofengland.co.uk/pra/Documents/publications/ps/2016/ps2816.pdf

Image credit: Nick Youngson