From the 30th September 2017, the underwriting criteria for new and existing but to let mortgages is changing where the borrower is defined as a Portfolio landlord.
Under rules created by the Prudential Regulatory Authority (PRA) this, this is where the landlord has 4 or more distinct mortgage buy to let properties.
The PRA expects lenders to recognise that existing experience and skills acquired in buy-to-let lending do not automatically translate into equivalent skills when assessing portfolio landlords.
Lending to portfolio landlords is inherently more complex given the amount of debt in aggregate, the cash flows and costs arising from multiple tenancies and potential risks of property and/or geographical concentrations.
These complexities mean that a specialist underwriting approach is appropriate.
Firms’ underwriting process for portfolio landlords should take a proportionate approach based on the knowledge of the borrower, their portfolio and alternative sources of income they have.
Examples of additional information lender’s may request from the borrower are as follows:
- the borrower’s experience in the buy-to-let market and their full portfolio of properties and outstanding mortgages;
- the assets and liabilities of the borrower, including any tax liability;
- the merits of any new lending in the context of the borrower’s existing buy-to-let portfolio together with their business plan; and
- historical and future expected cash flows associated with all of the borrower’s properties.
This will result in different approaches by the different lenders and may result in some deciding simply not to lend to anyone who has 4 or more buy to let properties (or someone with 3 who is looking to add to their portfolio).
For the most part we would expect most lenders to continue to lend but ask additional questions as part of their underwriting process, for instance:
- full details of the other properties within the portfolio including the mortgages outstanding, the rent received and current market value (plus who they are mortgaged to);
- the period each has been let and evidence of rent by copies of bank statements and/or Tenancy Agreements;
- proof of personal income for the borrower;
- Rental coverage on the new property as well as the rest of the portfolio;
- How rental coverage will be impacted by an assessment of whether the borrower is a lower, higher or additional rate tax payer (and the tax payable on their buy to let property income)
- percentage debt versus value across the portfolio;
- landlord experience;
- lenders should assess all buy-to-let mortgage contracts from the perspective of whether the borrower will be able to pay the sums due;
- Lenders will not be able to base their assessment of affordability on the equity in the property which is used as security under the buy-to-let mortgage contract, or take account of a future increase in property prices;
There will be likely be some additional rules for borrowers looking simply to remortgage on a pound for pound basis where the new rules may see the borrower fall foul and ordinarily struggle to remortgage. In effect a simpler approach, with less information and a lower amount of rent being required to allow a remortgage.
With all the PRA and FCA rules there is a degree of prescription to the rules but also some aspect of interpretation, so different lenders will chose different solutions and impose different criteria.
As with anything the best place to start with any thoughts of a new purchase (portfolio or otherwise) or a remortgage should be to speak to a qualified Independent Mortgage Broker.
Stuart Brown Mortgage Services serves the Herts, Beds & Bucks areas and in particular Hemel Hempstead, Berkhamsted, Leighton Buzzard and surrounding areas.
We would be happy to help with initial queries or fully sourcing a new mortgage and/or portfolio planning. We can help with selecting conveyancers or solicitors and talk to estate agents to help get any property offer be accepted too.
Please contact us to discuss your needs.
Mobile 07710 770 969
Herts 01442 252 040
Beds & Bucks 01525 877 650