Buy-to-let mortgage rules will be tightened in October, when the latest set of regulations governing landlords kick in.
What is changing?
Criteria laid out by the Bank of England’s Prudential Regulation Authority (PRA), which helps to manage risk in the financial system, say that lenders should give an extra level of scrutiny to “portfolio landlords”, those with four or more mortgaged properties. “Lending to portfolio landlords is inherently more complex given the quantum of debt in aggregate,” the PRA says. Lenders have some scope for interpreting the PRA’s rules, but they are expected to ask to see a landlord’s full portfolio, including outstanding mortgages. Previously, they would assess a new mortgage in isolation and assume the other properties were self-financing. “Now you will have to prove that they are,” says Shaun Church, the director of Private Finance, a broker.
Landlords will also have to divulge their other assets, liabilities and tax position, and show bank statements to ensure they have liquidity. Lenders will ask to see a business plan that explains how long the landlord has had the properties and their purpose as an investment, such as producing an income or retirement planning. Details of the landlord’s exit strategy will also be required, for example whether they plan to sell the properties or keep them as a legacy for heirs.
Specialist underwriters will assess each portfolio landlord’s case, so lenders will no longer be able to offer them new loans through automated systems.
“It is going to get harder for landlords. We are seeing lenders implement the changes early and some are pulling out of lending to portfolio landlords,” says Mr Church. “You need to be on top of it and thinking not just what life will be like in six months’ time but years down the line.”
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I’m a portfolio landlord, so what should I do?
The stricter rules do not apply to remortgages where the size of the mortgage required does not increase. Portfolio landlords looking to borrow more or buy a new mortgaged property are being urged to act now.
“We have been encouraging landlords to see if they have plans to raise capital out of their portfolios in the next six to twelve months. You need to take into consideration that you might not be able to borrow as much from October,” says Paul Elliott, the head of specialist lending at John Charcol, a mortgage broker. “You need to consider whether to bring forward your plans to get access to that equity.”
Mr Elliott says that only three lenders have laid out their terms so far: Aldermore Bank, Paragon Mortgages and the Mortgage Works.
Aldermore Bank says that it will take properties held in a company structure into account if the landlord has more than a 25 per cent stake in the company. Paragon will apply the rules to landlords borrowing through limited companies. The Mortgage Works does not lend to limited companies.
Why do we need more rule changes?
The rules were announced in March last year, when the Bank of England said that overly indebted landlords posed a risk to the economy if they could not afford their mortgages when interest rates rose. Lending to landlords has boomed. The total stock of banks’ buy-to-let mortgages is up by 40 per cent since the 2008 crisis, compared with growth of 2 per cent in owner-occupier mortgages. Buy-to-let loans make up about 15 per cent of lenders’ mortgage books, up from 2 per cent in 2000, which means that the stability of banks could be threatened by a wave of defaults.
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I thought that tougher rules had already come in?
These changes follow the introduction of tougher “stress tests” in January. The rules say that expected rent needs to cover a minimum of 125 per cent of the mortgage, which has been standard for some time.
Lenders must also take into account a landlord’s tax liabilities, after the government began restricting the amount of mortgage interest relief landlords can claim in April, with further restrictions to come. Many lenders have increased the rental cover requirements for higher-rate taxpayers to 145 per cent of the interest.
“Some lenders have become really cautious and put in a blanket cover of 145 per cent regardless of your taxation status,” Mr Elliott says. However, the Mortgage Works has recently loosened its criteria by bringing in a tiered system so that basic-rate taxpayers will benefit from the 125 per cent mortgage cover calculation.
In addition, lenders must check that the mortgage will be affordable at an interest rate of at least 5.5 per cent, an increase from the previous 5 per cent stress test. Although it seems a small change, it will limit how much landlords can borrow in areas where the yield (rent in relation to property prices) is lower, such as London.
