This month I share details of the forthcoming changes to mortgage lending for portfolio Buy to Let landlords. Much has been made of the changes to the way buy-to-let mortgage applications are underwritten for landlords. The headlines have been full of woe at the extra workload for brokers and lenders and the likelihood of reduced choice for landlords. However, the changes could be good news for everyone and here’s why.
A potted history
From October 2017, the Prudential Regulation Authority will enforce stricter, more responsible portfolio lending criteria and consequently better standards of business in the form of a very thorough paper trail. This comes three years after the residential property market was hit with similarly tough mortgage lending assessments. It seems the ramifications of the global financial crisis in 2008, caused in no small way by irresponsible mortgage lending, are still being felt.
The Prudential Regulation Authority defines portfolio Buy To Let landlords as having four or more distinct mortgaged buy-to-let properties, either together or separately, in aggregate. Under the current system, any buy-to-let mortgage application is assessed on the rental income potential and the value of the property itself. Portfolio landlords have always been able to mix and match their mortgage products with different lenders to get the best deal. And, typically, lenders may set limits on the number of mortgages a landlord can hold with them but have never had to factor into the lending assessment what products the landlord holds elsewhere. Until now that is.
The devil’s in the detail
From next month, lenders will have to examine and assess the loan risk of the entire portfolio as well as the landlord’s aggregated debt, cash flow, property investment experience, assets and liabilities (including tax obligations), total income, total borrowing and associated costs across all properties. And that’s before they carry out the usual assessment of the loan risk on the new property.
In addition, lenders will apply a stress test to the loan based on a portfolio Buy To Let landlord’s ability to pay should the interest rate rise above 5.5%. Only once the affordability criteria has been met will a lender consider the mortgage based on whether the property’s projected rental value would equal 145% of the monthly mortgage payment. Plus the whole process will need to be repeated for every new mortgage application or refinancing.
For brokers, it’s a potential minefield. Each lender will have different stress test values, have prioritised different elements of the necessary information and will likely request it all to be submitted via different spreadsheet formats. The unpleasant scenario facing most brokers is the prospect of filling in the seemingly endless spreadsheets on behalf of their clients who could easily have more than 100 properties in their portfolio. For lenders, it’s no better – they will have to read and assess vast quantities of information leading to longer decision waiting times for everyone. Many lenders may even choose to drop out of the buy-to-let market all together.
Ray Boulger, Senior Technical Manager at John Charcol comments that several lenders have already announced their policy, albeit in some cases with limited detail, on BTL lending to portfolio Buy To Let landlords from 1st October, when the new PRA rules come into force, but many haven’t. “BTL lenders which have historically been active in this sector are well placed to adapt to the new rules but a key commercial question for others, especially those whose criteria only allows a maximum of, say, 4 or 5 BTLs is whether to invest in the systems and training needed to accommodate the new rules. One which has decided not to do so is Platform Home Loans, which is perhaps not surprising in view of the problems of its parent (Co-op Bank), but the criteria of lenders which have already announced details varies considerably, as does the information they will require from borrowers.”
“Portfolio borrowers will have more hoops to jump through from 1st October but those who already manage their business efficiently should not be unduly impacted. However, with even more factors to consider when choosing a lender, the services of a good independent broker with detailed knowledge of the BTL market will become even more important in securing the best deal.” he adds.
For landlords, the changes could leave them with fewer mortgage choices so less opportunity to mix and match for the best deals. In addition, the mortgage arrangement fees are likely to increase because of the extra workload for brokers and lenders.
Karen Bennett, Managing Director for Shawbrook Commercial said: “The recent PRA changes – designed to clarify portfolio vs. non-portfolio landlords – pose fresh challenges for investors. Now classified as those holding four or more mortgaged properties, portfolio investors face increased scrutiny from lenders regarding their overall position.
“Close attention will be paid to factors like the spread of products in the portfolio, rental income vs. outstanding debt, level of gearing, personal income position and the long-term investment strategy. For some lenders, this represents a big change and possible effects include a need to invest in additional underwriting resource which may result in heightened costs for the customer. We may also see increased processing times and potential sensitivities around refinancing and higher LTV properties. Specialist advice has never been more important and Shawbrook would always advocate its use when navigating any regulatory change.”
In addition, portfolio Buy To Let landlords will need to have Orwellian organizational skills with up-to-date portfolio spreadsheets, business plans and cashflow forecasts, the past three months’ bank statements, SA302s, tax return documents and tenancy agreements. They will also feel under greater scrutiny and pressure to have a very profitable portfolio each time they look to increase it. That’s while they are still reeling from the government’s removal of the Wear and Tear tax allowance, the additional 3% stamp duty on second or more property purchases; and the tapering descent of tax relief from 40% to 20% by 2020.
Did someone mention benefits?
Surprisingly there are plenty of benefits, or rather, there will be. Landlords, for example, are less likely to be over-exposed. For less experienced landlords in particular, the strict process acts as a support mechanism to help them to better plan and manage their own portfolio; which can only grow when their profits and assets are able to support it.
Andrew Montlake, Director and Spokesperson for Coreco says landlords shouldn’t be put off by the changes. “Landlords should be looking at their portfolios and getting their house in order right now. It will be important to speak to a professional advisor with experience in this market who can help them review their portfolio and make sure their accounts are all up to date and fully disclosed to the Revenue.
For those with equity in their portfolio it makes a lot of sense to look at remortgaging whilst rates are low and pulling out equity to help speed up any future purchases. For those with existing properties who see the current conditions as a buying opportunity, and there are many that do, now is an excellent time to look at restructuring your portfolio and release equity at these low rates before all the new changes come into play. Releasing equity now will enable you to have the cash to move quickly when looking at building up your portfolio.”
For lenders the changes herald a more efficient and responsible future. The strict lending assessments, once they are bedded in, will take much of the risk out of the financial decision. It could result in a range of cheaper buy-to-let mortgages on the market as they “up-skill their underwriters” and diversify their products to take into account the changes
For specialist brokers the changes are a great opportunity to step up. If they do their homework before the changes come into force then they will get noticed by lenders and landlords alike – confidently pushing through their cases during the initial uncertainty and building better relationships with clients and lenders because of it.
The IT crowd
For brokers too there is extra help – a new platform from software provider eTech. It converts the extensive information from landlords into the appropriate format and can automatically populate spreadsheets. It can also carry out the required stress tests. eTech director of lending and survey services Mark Blackwell says: “Brokers have got to have their life made easier. Some portfolios have 400 properties in them. We are able to take any form of spreadsheet data and convert it into that lender’s required format.”
For brokers the software is invaluable. Commenting in Mortgage Strategy Steve Olejnik, Mortgages for Business’ chief operating officer, said: “It can take an entire portfolio spreadsheet – no matter how large – and process the data so that we can submit an application, at the click of a button… Not only will it save us many hours of work, it will be a great customer service tool.”
Change is good
So while the new ruling is causing concern, once everything is up and running the new process will offer pretty fool-proof lending. Landlords will have a support mechanism of sorts and the best brokers will really get a chance to shine: advising portfolio landlords on what new products on the market best suit their needs (including a wide selection of specialist lenders with preferential rates based on their business relationship with the broker), advising on what information needs to be submitted and taking the headache out of the submission itself. If we can just make it through the bedding-in period, the future looks bright for everybody.
If you are considering a buy-to-let property investment and would like an up to date rental valuation, our online calculator can be found here.
View all posts by Vidhur Mehra