Landlords: are you aware of Buy-To-Let mortgage changes?
In recent years, there have been numerous Government and Bank of England measures introduced with the intention of controlling the buy-to-let market and making it easier for occupiers to purchase property.
Last year, an additional 3% stamp duty surcharge was introduced on the purchase of buy-to-let and second homes. On top of this, the controversial restriction of landlords’ interest tax relief on their buy-to-let mortgages is being phased in over the next four years.
On top of these measures, there's also been a concerted effort to review the buy-to-let mortgage lending sector, led by the Bank of England's Prudential Regulation Authority (PRA).
Around the turn of the year, the PRA introduced new rules, meaning prospective buy-to-let borrowers now have to prove that they could afford repayments if interest rates increased to 5.5% from a current low of 0.25%.
And now, the PRA is introducing further measures from October 1 - this time aimed at landlords with four or more properties.
What are the new rules?
Building on the increased stress tests, the new rules focus on landlords with four or more properties and require buy-to-let lenders to tighten up their underwriting processes.
The key issue for landlords with four or more properties is that their whole portfolio will now be taken into account when applying for buy-to-let lending. This means that it could be harder for some landlords to get a mortgage if one or two of their properties are not performing as they should be.
Lenders will now require prospective buy-to-let borrowers to be able to withstand the increased stress tests and provide more information about their finances, including:
- Details on the total amount of their mortgage borrowing;
- Assets and liabilities;
- Historical and future expected cash flow;
- Income from both property and elsewhere.
The rules are being introduced industry-wide, but in recent months lenders have been announcing how they will be adapting to the new system in different ways.
Some might stop lending to landlords with four or more properties altogether, while others have changed their lending criteria or introduced a series of additional measures for prospective borrowers to meet.
How have mortgage lenders reacted?
Skipton: The lender has confirmed that it will continue to finance landlords with four or more properties. It has, however, revised its affordability requirements to 150% at 5.5% against its standard agreement of 145% at 5.5%. Moreover, landlords with four or more properties will need to show an income of at least £45,000 and Skipton's maximum portfolio size of ten will remain the same.
Leeds Building Society: The organisation will now need borrowers to provide details of assets and liabilities, while declaring their future investment plans. Applicants will also be required to provide cashflow information in complex cases. Leeds will be increasing its maximum portfolio to 10, but has confirmed it’s not altering its loan-to-value (LTV) criteria, nor its maximum loan size, interest coverage ratio and stress tests.
NatWest: Announcing a significant overhaul of its current buy-to-let measures, NatWest says it will be asking for landlords applying for finance to provide information about their experience, including use of letting agents and future investment plans. The bank is increasing its maximum portfolio size quite considerably, from four to 10.
BM Solutions: The organisation is another to increase its maximum portfolio size to ten (and up to three properties with Lloyds Bank Group). What's more, landlords using BM Solutions for buy-to-let finance will now need a minimum income of at least £30,000 earned taxable income per portfolio application. It will also no longer underwrite portfolios with a maximum aggregate LTV of more than 75%.
The majority of buy-to-let lenders have announced some sort of changes. Kensington and New Street, Northview and Paragon are amongst a host of others to have made public announcements regarding the PRA’s underwriting crackdown.
Should landlords remortgage?
One common piece of advice given by industry experts over the course of the year has been that landlords should seek to remortgage before the new system as it will be easier to get a better mortgage rate before October 1.
Many landlords will already have taken advantage of the existing system before it's too late, and those thinking of remortgaging now will have to meet the new affordability criteria set out by lenders.
As we move ever closer to the introduction of the new rules, it's clear that landlords with four or more properties looking to expand their portfolios further will need to have all their paperwork in order if they want to be granted a new buy-to-let mortgage.
Before applying for funding, landlords will need to think carefully about their investment strategy and seeking the required financial advice will now be more important than ever.