In September 2017, new affordability rules were announced for portfolio landlords. The Bank of England’s Prudential Regulation Authority is setting stricter stress testing for landlords with four or more properties.
Some leading banks are creating better systems that are designed to manage the more complex processes, whilst other banks are completely sacrificing their involvement in the but-to-let market.
Added Restrictions to Borrowing for Portfolio Landlords
Following the introduction of the new buy-to-let rules in September 2017, lenders will be required to assess the whole portfolio of a prospective landlord, looking at each of their properties. It used to be the case that landlords could show their overall accounts to lenders when making an application, but they will now need to produce specific details of each of their properties, including cash flow projections and business models.
It is also known that affordability will be vigorously tested. When a portfolio landlord applies for new borrowing for a future property or in order to remortgage any current properties, the monthly rental income would need to cover a minimum of 125% of the monthly repayments, with stress testing set at a 5.5% interest rate.
Lender Reactions to PRA Changes
The new rules and changes set by the PRA are likely to have an impact upon all specialist lenders in some way or another, and all are reacting in their own unique way. Whilst industry leaders Barclays are suggesting that the changes will have a minimal impact upon them, others are reducing their interest cover ratios. It is also now known that both Santander and Platform will refrain from offering portfolio landlords any future deals.
We have outlined the changes that will be made to the policies of some of the top UK lenders:
Barclays – Minimal impact to their operations. Prospective borrowers will be required to complete a ‘property schedule’ giving additional information to specialist underwriters.
The Mortgage Works (Nationwide) – 145% interest cover ratio, stress tested at 4.5% for landlords with no more than 10 properties, and 5.5% for 11 or more properties. Portfolios with less than seven properties will be denied like-for-like remortgages. A new system for online applications and a dedicated team for brokers.
BM Solutions (Lloyds) – 145% interest cover ratio, stress tested at 5.5%. No more than 10 buy-to-let properties allowed (3 with Lloyds). A new underwriting system is set to be launched.
Platform (Co-operative) – No longer lending to portfolio landlords. Those with three properties or less can still borrow.
Santander – No longer lending to portfolio landlords who want to increase borrowing, like for like remortgages may be available in some cases.
Accord – 135% interest cover ratio. No other changes of note.
Coventry Building Society – 125% interest cover ratio, stress tested at 5.5%. A maximum 65% loan-to-value ratio across whole portfolio. No properties within the portfolio to have interest cover ratio of less than 100%.
Leeds Building Society – ‘Portfolio landlord declaration form’ to be introduced to process. More complicated cases will require specific cash flow details, and decisions regarding lending should be made within 24 hours.
Paragon/Mortgage Trust – Minimal impact to their operations, provisions already implemented in advance. Paragon set to handle all applications from portfolio landlords.
Is the Buy-to-Let Market going to be affected?
Although it is not possible to state how the market will react to the changes, it is likely that the process may take slightly longer to complete because of more complex affordability checks and interest rates could increase. Landlords might look at the option of incorporating their portfolios in order to avoid the effects of the changes, but this could lead to further expenses in the form of stamp duty and capital gains tax. As the process may take longer to complete because of the more complex affordability checks, it does mean that risky borrowing will be reduced.
Author Bio
Hopwood House are specialists in UK buy to let property investment. For more information on buy to let property investment, please browse our comprehensive buy to let property guide.
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Daniel Peacock