New rules on borrowing for portfolio buy-to-let investors
From the 30th September this year, landlords with four or more buy-to-let properties will have to satisfy different criteria to secure mortgage borrowing, as they will be considered ‘portfolio investors’ under new rules being introduced by the Prudential Regulation Authority.
In order to comply with the new portfolio landlord underwriting standards, lenders will now be looking at the total income versus borrowing across all a landlord’s properties, to ensure that any new borrowing doesn’t adversely affect affordability for other properties within the portfolio.
This means more work for lenders, who will have to investigate each mortgaged property held by the landlord in more detail, then apply an Interest Coverage Ratio (ICR) across the portfolio. This ICR will vary, depending on the individual lender and the number of properties owned with a mortgage
In addition, in some cases, the lender will also take into account the landlord’s individual earned income/salary.
Brian Murphy, Head of Lending at Mortgage Advice Bureau, comments: “The impact of the increased underwriting resource required to implement these measures has meant that some smaller building societies have announced that, for the time being, they will not provide buy- to-let mortgages for investors with four properties or more, however, many providers - particularly those specialising in buy-to-let - will continue to offer mortgages to both portfolio and non-portfolio landlords.”
The reality is that the majority of landlords will not be affected. A survey carried out by the Strategic Society Centre in 2013, showed that 72% of private rented sector (PRS) landlords had just one rental property, with 12% owning three or more. A further survey of 1,071 landlords, carried out by YouGov on behalf of Shelter in mid-2015, found 59% had one buy-to-let, with 32% owning between two and four. This survey also revealed 45% of landlords owned their property/ies outright, with no mortgage borrowing, and a further 40% had a loan to value of 50% or less. As such, it’s unlikely that the buy-to-let sector will experience much disruption as a result of the new rules.
For those who own four or more properties, as well as those who currently have three and plan to buy a fourth, the change is likely to mean a more limited choice of lenders and products when they come to purchase or remortgage. But, realistically, only those who have highly-leveraged properties and are not seeing much cash flow need to be at all concerned.
The practical differences the new rules will mean for landlords
If you already fall into the category of ‘portfolio investor’ or are planning to add to your portfolio and will therefore become one, these are some of the key considerations for you, moving forward:
The application process will undoubtedly take longer
This means planning well ahead and making sure you allow three months or more for lenders to make the checks they need.
You may not be able to stay with your current lender when you refinance
Some smaller lenders, particularly building societies, have decided not to continue offering buy-to-let mortgages to portfolio investors in light of the extra work required to satisfy the new rules. So, if you have four or more properties, you should contact your lender right away to find out:
- Where you stand with your current mortgage deals
- Whether you will be able to refinance with them
- How they might be able to help you secure new mortgages elsewhere, such as giving you a little extra time before your current deals expire.
You will need to provide your lender with much more detailed information
That is likely to include, for every property you own:
- Current mortgage borrowing
- Rental income
- Related outgoings
- Rental profits
- Tax and business returns
- Other financial assets held
- Personal income
As some of this may take time to secure and could vary slightly from one lender to another, make sure you ask your broker for a complete list of what you will need to provide as early as possible.
So if you have not carried out a buy-to-let portfolio review within the last six months, now is definitely the time to do so. Work with your tax adviser, mortgage adviser and wealth manager, if you have one, to assess your total level of borrowing versus assets and take advice on whether you might need to make any changes in order to reduce the likelihood of running into any difficulties securing mortgage finance in the future.
Brian Murphy concludes: “The sum total is, if you are an ‘accidental landlord’, for example letting only one property due to a change in circumstances, you won’t be affected by the new legislation, therefore it’s a case of continuing as normal for most. In fact, the income tax changes that have been recently introduced will possibly have a far greater impact in the longer term.”
If you are a portfolio landlord and have any concerns about the potential availability of finance for either a new mortgage or a remortgage, please get in touch with us and one of our advisers will be very happy to talk through your options.