New buy-to-let mortgage rules – what landlords should know
If you are looking to invest in a buy-to-let property and require a mortgage, it could be more difficult to borrow the money than you might think. In 2017, the Prudential Regulation Authority (PRA) issued new guidance regarding how lenders should assess the mortgage applications of landlords.
Most buy-to-let lenders are regulated by the PRA. You can expect any mortgage application you make to be impacted by the new guidance, which relates to stress-tests for rental cover. There are now also additional tests for ‘portfolio landlords’ – landlords with four or more mortgaged properties.
Stress-tests for rental cover
The rental income you can generate from your buy-to-let must now cover at least 125% of your mortgage payment when the interest rate is at least 5.5%. Most lenders will insist that the rent covers the PRA’s recommended 145% of the mortgage payment. In other words, the amount you can borrow will be equal to the rent you can achieve + 5.5% + 145%. This means you can borrow roughly £15,000 for each £100 of monthly rental income.
If you took out your mortgage prior to January 2017, there is no need to worry about the changes unless you wish to remortgage the property. Even then, the news rules will only apply if you are increasing the size of your loan.
Loan to Value (LTV) is no longer the only test of how much you can borrow, but that is a good thing. If your property fails the rental stress test, it is almost certainly a bad investment which you should avoid.
The new rules do not apply to mortgage applications from limited companies, mortgages for commercial properties, or holiday lets and loans which offer fixed interest rates for periods of at least five years.
New tests for portfolio landlords
From September 2017, the PRA requires mortgage lenders to question portfolio landlords in greater depth when assessing their applications for new loans. A mortgage should no longer be considered in isolation but rather as one aspect of your entire property business.
Only those with four or more mortgaged properties are deemed portfolio landlords. But mortgaged properties within a limited company owned by a landlord will be considered to belong to the individual for the purpose of mortgage applications.
You will be asked to provide a great deal of information which may take you some time to put together, and this will lengthen the application process. The PRA is suggesting that lenders request the following:
- Full details of your property portfolio
- Statement of borrowings
- Cashflow forecasts
- Statement of income and expenditure
- Business plan
- Three months’ bank statements
- Tenancy agreements from all properties in your portfolio
- Your SA302s tax calculation summary from HMRC.
It is up to each individual lender to decide how much of this information they request before making their decision. Some may want to see even more documentation to support your application, others will ask for less. Any anomalies in your business, such as unprofitable properties and those in negative equity, will be drawn to the attention of the lenders. It would be a good idea to address any issues with your existing portfolio before attempting to expand your empire.
Planning ahead and reviewing your business
The new tests will inevitably result in a lengthier application process and a higher proportion of applications being declined. On the face of it, this is bad news, but a detailed examination of your financial affairs could flag up issues that you have overlooked and give you the incentive you need to address them. If you are planning to expand your business, it pays to plan ahead, and now is the time to review your existing portfolio.
The financial climate has changed. Lenders are obliged to be more diligent in checking buy-to-let mortgage applications. The burden of the additional work has already caused some lenders to withdraw from the buy-to-let market.
It will be more difficult to obtain a mortgage moving forward, whether you are a portfolio landlord or looking to purchase your first rental property. If you are considering a new investment, it is best to plan a head, get your affairs in order and prepare yourself for the application process.