New buy-to-let rules have recently come into effect which will see stricter criteria for landlords. The rules are set to have an impact for those landlords with four or more mortgaged buy to let (BTL) properties. Under the new rules, if as a landlord you want to make an application for a buy-to-let-mortgage on a new rental property, the lender has to take a look at your entire property portfolio. It’s only then that lenders can decide what mortgage deal they are able to offer on a single property.
The Bank of England or more specifically, the Prudential Regulation Authority, is implementing tougher stress tests and affordability assessments for landlords. New regulations do apply to those landlords who own three rental properties and want to take a mortgage on a fourth. The reason behind this is to differentiate between simple and more complex buy-to-lets. This in turn means that lenders will have to view an entire portfolio when making a decision on a single buy-to-let mortgage application.
The new regulations is big news for landlords. As a landlord, details of all BTL properties you own will need to be disclosed as part of every application. This will include:-
- All income
- Wear and tear
- Details of all other mortgages
The information provided will then be stress tested. Essentially what this means is that you won’t be assessed on the affordability of a single property you wish to buy or re- mortgage, but on your entire portfolio. The PRA’s definition of a portfolio is landlord borrowers who own four or more distinctly buy-to-let mortgaged properties. However, this doesn’t include unencumbered properties or properties on consent to let.
What does it mean for me?
The rule changes will certainly make it harder for some landlords to secure finance. If a single property in your portfolio is underperforming it could tarnish the rest. Let’s say for example you’ve got a portfolio of six properties, five of which are profitable and generate income in excess of your mortgage repayments. The remaining property doesn’t but the shortfall is covered by the other five. This poor performance is now going to have an impact on any future mortgage application for your property portfolio as a whole. This means it may be more difficult to secure finance especially if you want higher loan-to-value mortgages on low-yielding properties.
Due to the new buy to let rule changes, there is also the more general affordability criteria to take into account. You will be expected to show that you can afford the repayments if interest rates were to hit 5.5%. What’s more, landlords now might also be required to submit a business plan which could add another obstacle to the process.
What can I do about the changes?
The first thing to do is try to cut costs wherever possible. Try cutting your interest costs by re-mortgaging and getting up-to-date rental valuations on your property portfolio. Take a closer look at your properties and see how they’re performing. If they are above target, great, but if one isn’t it could be time to start thinking of ways to boost the underperforming property potential in order to secure further finance in the future. Your lender will then be in a much stronger position to recalculate your loan to value (LTV). The good news is that a lower LTV usually ensures a better interest rate and a larger selection of lenders for you to choose from.