Banks will assess the viability of portfolios not single properties before lending
Large buy-to-let landlords braced for tougher mortgage rules
by James Pickford
Buy-to-let landlords with four properties or more are bracing themselves for the impact of new lending rules that come into force at the end of September which will make it tougher to get a mortgage. When lenders consider granting a new buy-to-let loan to so-called portfolio landlords, they must now assess the viability of all mortgaged properties in their portfolio — even if they are only lending on a single property — following an edict from the Bank of England’s Prudential Regulation Authority (PRA).The specialist affordability tests, effective from September 30, will complicate the lending process for lenders, brokers and borrowers. Portfolio landlords will be expected to provide details of mortgages, cash flows, tax records and business models for all of their mortgaged properties — plus details of their other sources of income. In some cases, these may not meet banks’ lending criteria.
The industry’s minimum affordability test for new buy-to-let lending is for monthly rental income to cover 125 per cent of mortgage interest, even when “stress tested” at an interest rate of 5.5 per cent. The PRA guidelines state that lenders should take “a proportionate approach, based on their knowledge of the borrower, their portfolio and alternative sources of income they have”.Some lenders, such as Santander and Platform, the intermediary arm of the Co-operative Bank, have already closed new capital raising to portfolio landlords, defined by the PRA as those with four or more mortgaged properties. Others, such as Barclays, are setting limits to the portfolio sizes they will consider for applications. However, mortgage brokers have complained that several lenders have not made clear their policies on portfolio lending ahead of the change. Steve Olejnik, chief operating officer at buy-to-let mortgage broker Mortgages for Business, said:
“It’s been disappointing how slow lenders have been in announcing how they’re going to change underwriting. Some are waiting. Some are saying it’s business as usual. But deep down they need to have some alternative policy in the background.” The rules will affect a small share of landlords but a higher proportion of rental housing stock. Research published by the Council of Mortgage Lenders last December found 62 per cent of landlords owned just one rented property, while 7 per cent owned five or more. The larger landlords, though, owned nearly 40 per cent of homes.
Much of the work of assessing a portfolio is likely to be done by mortgage brokers, who will have to judge which lender might be appropriate for their client. Aaron Strutt at broker Trinity Financial warned this would be problematic. “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.”Mr Olejnik said that professional landlords who were used to running their portfolio as a business were less likely to be troubled by the requirements, but so-called “amateur landlords” may struggle to provide data or pass the lenders’ criteria.
“There will be dinner party landlords out there with four or five properties who don’t understand the new rules — but they’ll have to understand them the next time they try to borrow some money,” he said. The measures will exacerbate the problems of remortgaging for portfolio landlords in areas of the country where sluggish house price growth has left highly leveraged borrowers unable to reduce their gearing over time. Chris Norris, head of policy at the National Landlords Association, said the North East was one region where property prices had yet to recover to pre-financial crisis levels.
“We know there are lots of landlords who invested heavily in the early part of the century and they’re already finding it difficult to remortgage,” he said. The PRA requirement is the latest in a string of tax and regulatory measures that have piled pressure on buy-to-let landlords, from a stamp duty surcharge to the loss of tax relief on mortgage interest and minimum “stress rates” imposed on lenders. Mr Norris said the cumulative burden on landlords was “horrific”. In the segment with mid-sized portfolios, he said the NLA was for the first time seeing people sell more properties than they were buying. “It’s to do with the tax burden and not knowing what regulation will look like round the corner.
Those are the things that are really grinding landlords down.” However, there might be some landlords who benefit from the latest requirement, since their overall portfolio might be in better shape than the property they were seeking to borrow on, giving lenders more confidence. “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,” he said. Richard Donnell, research director at Hometrack, a property market analyst, said it would also encourage landlords to bring order to their portfolio, where they may have as many mortgages as rental homes, having selected the best available deal at the time of purchase. “There’s a lot to be said to have all your mortgages in one place,” he said. “It’s going to force landlords to think of their portfolio as one entity.”
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