Back in January 2017, the Bank of England’s Prudential Regulation Authority (PRA) introduced the first phase of its changes to buy-to-let mortgage lending. Now, the industry is preparing for phase two.
The first phase included stricter affordability tests, including a stress test on interest rate rises, for buy-to-let landlords.
From 30th September 2017, however, it’s portfolio landlords who will be targeted.
The PRA is to require changes to the way in which buy-to-let mortgage applications are underwritten for portfolio landlords – those with four or more mortgaged buy-to-let properties – as the PRA has found that arrears rates increase as portfolio size grows.
From 30th September, any borrower who falls into the portfolio landlord category will be required to pass specialist affordability checks.
The PRA has not prescribed a requirement, but outlined that lenders should take into consideration a landlord’s experience and record their full portfolio, rental income and outstanding mortgages, in addition to assets and liabilities. They should also take account of the merits of any new lending in accordance with the landlord’s business plan, along with historical and future expected cash flow.
The PRA is not concerned with recent tax changes.
How will you be affected?
If you’re a portfolio landlord, from 30th September, lenders will need to ensure that you are not over-exposed and, as such, will stress your background portfolio – they will take your entire buy-to-let property portfolio into account when making a lending decision.
Although not all lenders have outlined how they will apply the guidelines, you can expect them to assess the following:
- Your property investment experience
- The total amount of mortgage borrowing you have across your whole portfolio
- Your assets and liabilities, including tax liability
- The merits of any new lending in context of your existing buy-to-let portfolio, along with your business plan
- Historical and future expected cash flow from your portfolio
- Your income, both from property and elsewhere
You should be prepared to be asked for your up-to-date property portfolio spreadsheet, a business plan, cash flow forecasts, your last three months’ bank statements, submitted tax returns, and possibly income and expenditure statements for your portfolio.
How you can prepare
If you do plan to take out a mortgage for another buy-to-let property (if you already have four or more mortgaged buy-to-let properties), you should be ready for the additional tests.
To be in the best position, you should get your paperwork in order and ready for the application process. As ever, it’s important to keep your property portfolio spreadsheet up to date.
If you are looking to review your portfolio, it’s probably wise to do this sooner rather than later, so get ready for the changes.