Lending rules have tightened, but you can still get a buy-to-let deal at all-time low interest rates
New mortgage lending rules for lenders are meant to protect landlords, but they could make it harder for some to get a buy-to-let mortgage.
The Prudential Regulation Authority at the Bank of England has introduced new rules for firms that lend to landlords. By tightening lending criteria, the regulators want to stop landlords from overstretching, and leaving themselves vulnerable to mortgage arrears.
Lenders have been forced to more carefully assess the affordability of landlords before offering them a mortgage.
They have long required the expected rental income from a property to cover more than the actual monthly repayments, to give landlords a buffer against unexpected costs and void periods.
But from the start of 2017 lenders have had to take into account all of the costs of running the property, including tax liability (which could rise under the new rules [link to article 3]) and insurance, when they work out what a landlord can afford.
The upshot is that many lenders have needed to increase their minimum rental cover to accommodate the changes. There is no prescribed level (it’s up to the lender), but 145% of the mortgage payment is now typical, compared to 125% before the new rules.
On top of this, lenders now need to stress-test the landlord’s affordability – checking you can still afford your mortgage if rates rise. Now many will check you can afford your repayments based on a notional interest rate of 5.5%, even if your actual mortgage rate will be much lower than that.
Impact on landlords
These technical changes to lending criteria make it harder for landlords to prove they can afford the mortgage repayments, especially those investors who are highly geared.
You now need to have a comfortable buffer in terms of achievable rental income in relation to, not only the actual monthly mortgage payments, but the potential payments if rates rise. In some areas – such as the South East where purchase prices are high – this could prove a challenge, especially for landlords with modest deposits.
The 5.5% stress test is exempt where the interest rate is fixed for five years or more, so it is likely there will be an increase in these longer-term deals over the next 12 months.
You might not consider yourself a ‘portfolio landlord’ but if you have four or more properties to let, the regulator now does, and it considers you a riskier lending proposition.
From 30th September all lenders need to have a separate approach to underwriting for this group of landlords which takes into account, not only the property being mortgaged, but the applicant’s whole portfolio – residential and commercial – and other financial interests.
Lenders have been asked by the regulator to look at things such as your payment record on other properties, the equity you have across your portfolio, and your income from other sources when they work out whether or not you can afford to borrow.
It also suggested that lenders ask you for details of your experience as a landlord, all of your assets and liabilities, including tax, and a business plan including cashflow projections across your portfolio.
Getting a deal
If you have four or more properties it could become harder, or at least more time consuming, to get a new mortgage, or release equity from existing properties.
Some lenders have already decided not to operate in the portfolio lending sector, limiting their buy-to-let mortgages to landlords with one, two or three properties. So, your choice of lender will be restricted.
Those regulated lenders who will lend to portfolio landlords now have a separate underwriting policy, which is likely to require more documentation and take into account all of your properties.
This new system is still bedding in, so the process may become smoother in time, but for now, expect more red tape, longer mortgage processing times and potentially higher costs.
Some lenders that already specialised in portfolio lending say their underwriting criteria hasn’t needed to change significantly, and portfolio landlords still have a wide choice of borrowing options, albeit more limited ones.
If you are looking for mortgage finance, taking independent advice from a professional broker will give you access to lenders that don’t operate directly to borrowers.
Mortgage rates for landlords are at an all-time low so it can pay to engage an expert to help you navigate the ever-changing lending criteria. Brokers know which lenders are likely to accept you, and they will push through the process to completion – giving you time to focus on your property portfolio.
Christina Hoghton has been writing about mortgages and property investment for 17 years, for magazines, newspapers, major lenders, challenger banks, trade bodies and brokers. After a stint in London working as an editor for a financial publisher she returned to Manchester, as a freelance writer and communications consultant. Christina also holds the mortgage adviser qualification, CeMAP. She’s a mum of three, Man City fan and, now she’s back up North, finally a homeowner.
Disclaimer Please note – This is not tax or mortgage advice, it is just a broad overview of the recent changes. Please consult a professional who can assist you with your personal circumstances and how these changes might effect you.