Buy-to-let squeeze continues: Landlords with multiple properties are warned of mortgage headache when new rules bite in 2017
11-12-2016
By Sarah Davidson For www.Thisismoney.co.uk
Landlords with four or more buy-to-let mortgages have been warned to prepare for a major headache when new rules next year force lenders into tougher lending assessments.
From 30 September 2017, rules laid out by the Bank of England's Prudential Regulation Authority mean any landlord who owns four or more mortgaged buy-to-let properties will have to submit income and mortgage details on all of them every time they refinance one, or purchase a new property.
It means that the volume of work for lenders will increase massively, and one expert has warned it could mean some lenders stop lending to such landlords altogether.
Under the new rules if a lender has to review a portfolio of 10 mortgaged buy-to-let properties in order to offer a mortgage on a single property it will have to obtain evidence of the rental income and mortgages on all 10 properties
Currently most lenders assess a buy-to-let mortgage application based on the rental income and property value of the property they are lending against.
But under the new rules if a lender has to review a portfolio of 10 mortgaged buy-to-let properties in order to offer a mortgage on a single property it will have to obtain evidence of the rental income and mortgages on all 10 properties.
Looking for buy-to-let mortgage advice? Check out the This is Money mortgage service
Some buy-to-let lenders already place restrictions on the number of buy-to-let mortgages you can have with them - usually allowing a maximum of three or four, or total borrowing of £1million to £2million.
But they don't necessarily take into account whether you have buy-to-let mortgages with another lender.
Ray Boulger, of mortgage broker John Charcol, said: 'Many lenders will find the significantly enhanced underwriting process uneconomic.
'Although these new rules don’t come into force until this time next year, most lenders are likely to introduce them before that date. That is likely to result in many lenders withdrawing from the market.'
Higher rates, fewer options
The PRA rules are intended to make sure that in future lenders look at landlords' full financial exposure when assessing them for a mortgage - in the hope that riskier lending is avoided.
But more underwriting will push up costs for lenders - and consequently for landlords in this bracket. Mortgages for these so-called portfolio landlords are therefore likely to get more expensive over the coming 12 months and there are likely to be fewer options available.
Mortgages for portfolio landlords are likely to get more expensive over the coming 12 months.
Boulger is also concerned that landlords' mortgage costs won't just go up at individual product levels because of the rules, but also that overall costs will rise because landlords won't be able to mix and match lenders across their portfolio.
'Although there are a few lenders whose target market is portfolio landlords, and consequently their underwriting and pricing reflects that, in most cases we can find better mortgage value for clients by spreading their borrowing between different lenders,' said Boulger.
'Not only is the lender with the best five-year fix likely to be different from the one with the best variable rate, or two-year fix, or 10-year fix, but also different underwriting criteria means that a borrower may qualify for a mortgage with a lender on one property but not another.
'Matching the client, property and loan-to-value required with the right lender for each property can make a significant difference to overall borrowing costs,' he said.
An assault from all sides
It comes just when landlords are already suffering from a barrage of rule changes affecting how they structure their investments.
From April 2017 landlords who own buy-to-lets in their own name will see tax relief on mortgage interest tapered back from a maximum of 45 per cent and replaced with a flat 20 per cent tax credit by 2020.
Together with the recent removal of the wear and tear allowance and the introduction of a 3 per cent stamp duty surcharge in April this year, these changes could make it more financially viable to own buy-to-let in a limited company.
The new mortgage rules, part of set of measures laid out in September by the PRA which also toughen up rental income requirements, apply both to landlords who own properties in their own names and to landlords who own through a limited company.
Mortgages for portfolio landlords are likely to get more expensive over the coming 12 months.
The PRA believes the rules are necessary to ensure the economy remains stable.
It said: 'Arrears rates increase as portfolio size increases. The PRA considered the impact that the personal tax changes would have on landlords, and particularly those landlords using their personal income to supplement the rent.
'For portfolio landlords, who are not set up as limited companies, this additional tax burden will be considerable and so a portfolio view becomes even more relevant for new borrowing.'
LENDERS SET OUT RENTAL INCOME REQUIREMENTS
- BM Solutions, part of Lloyds Banking Group and one of the UK's largest buy-to-let lenders, will not introduce a blanket rental income ratio of 145 per cent for landlords as most other lenders have done. Instead, it will keep its minimum rental coverage ratio at 125 per cent for basic rate tax payers. Higher and top rate taxpayers will be given mortgage terms with a rental income ratio that relates to their individual circumstances.
- BM's approach is markedly different from other lenders which over the past six months have raised the amount of rental income required to qualify for a mortgage, following tough new rules introduced by the PRA in September.
- Santander recently revealed it was the latest lender to hike the amount of rent landlords need to earn to cover their mortgage payments. It means that instead of needing rent equal to 125 per cent of their monthly mortgage payment at a 'stress' interest rate of 5 per cent, landlords borrowing from Santander will need rental income to equal 145 per cent of the mortgage at a rate of 5.5 per cent.
It will put significant pressure on the amount landlords can borrow.
Nationwide's buy-to-let arm, The Mortgage Works, is the other of the UK's largest lenders to landlords and set the 145 per cent rental income ratio as a standard earlier this year in anticipation of the tighter PRA rules. It was followed by Barclays, TSB, Foundation Home Loans and Keystone Property Finance.
It could be working getting specialist advice
Not everyone is gloomy though. Specialist buy-to-let adviser Steve Olejnik of Mortgages for Business, said it's unlikely to affect whether landlords can get a mortgage or not.
'It's possible that some lenders will focus on landlords with up to three mortgaged buy-to-let properties but I expect most to up-skill their underwriters and start preparing to be more curious about landlords' backgrounds including reviewing portfolios,' he predicts.
'Whilst it will be more work for the mainstream buy-to-let lenders - and this may be reflected in pricing - rather than leaving the sector, they may limit their distribution channels to experienced buy-to-let brokers.
'Having said this, there are plenty of specialist buy-to-let lenders with robust underwriting standards already and their processes are likely to change very little.'
What should you do now?
Mortgage advisers say... get in touch with your mortgage adviser now. This might sound self-serving but it's probably a good idea nevertheless.
Brokers have access to a far wider selection of lenders than you see on the high street or even online, and they often get preferential rates for buy-to-let clients.
This is especially true for more complex buy-to-let - including larger portfolios, multi-unit properties, houses in multiple occupation, large loan sizes, lending to limited companies and other things that mean the loan isn't suitable for the large high street lenders.
The good news for landlords is there are a growing number of lenders in this part of the market - Paragon Mortgages has been focused on professional landlords for 20 years and in the past 10 years, new lenders such as Shawbrook Bank, Precise Mortgages, Aldermore Bank, Keystone Property Finance, Interbay Commercial, Foundation Homeloans and Fleet Mortgages have appeared.
Dealing with the complex needs of landlords is these lenders' bread and butter so there is no need to panic.