Buy to let landlords with four or more properties have been warned to prepare now for new rules, which will result in stricter lending criteria – and higher mortgage rates.
From 30 September, borrowers with four or more mortgaged properties – dubbed ‘portfolio landlords’ – will have their entire portfolio of properties assessed when remortgaging a buy to let or taking out a new buy to let mortgage.
This differs from the present rules, where portfolio landlords are usually only assessed on the property they’re adding to their portfolio or remortgaging.
Borrowers’ experience in the buy to let market, as well as any alternative sources of income will also be considered as part of the new lending requirements.
The Prudential Regulation Authority (PRA), which announced these new rules in September 2016, stated at the time that this change in approach is needed as lending to portfolio landlords is “inherently more complex given the quantum of debt in aggregate, the cash flows and costs arising from multiple tenancies and potential risks of property and/or geographical concentrations”.
What do the stricter rules mean in reality?
To summarise, mortgage experts believe the rule change will likely result in the following – although of course no-one has a crystal ball:
- Less mortgage choice as some lenders will pull out of the market or won’t be ready on time.
- Higher mortgage rates if competition is reduced.
- Longer waits for mortgage approvals as there will be additional administration for lenders.
- Borrowers themselves having to provide vastly more information and paperwork.
Mortgage expert, Ray Boulger, who works for broker John Charcol, explains. “Some lenders will take the view that it’s not viable to do the extra work, or they might want to do the work but they will not be ready when the rules come in.
“And if there’s less choice, that would suggest there’s more pressure on those lenders that can provide mortgages, and those lenders will have to spend more time on each case and admin delays will build-up, which means people may have to wait longer for a mortgage approval.”
The change will also push up prices, according to Mr Boulger. “Absolutely prices will go up. The laws of competition are clearly going to apply – one way lenders can limit the volume of business is by upping the price. We’ve seen this happen in the past where application levels have needed to be slowed. That’s easier than changing application criteria and it’s a short-term solution.”
Lenders have yet to start pulling deals though. Data from comparison service, Moneyfacts, reveals that there were more buy to let lenders offering both fixed and variable products to landlords with four or more properties in July 2017 than there were in July 2016.
And competition in the market is still strong. Andrew Montlake, an expert at mortgage broker Coreco, says: “The low rate environment, coupled with lenders’ desire to still lend in a smaller buy to let market has meant that competitive pressures have driven mortgage rates down to levels never seen in the buy to let market. Hence the buy to let remortgage market is currently booming.
“However, once these changes come in to play, the additional cost in terms of time and training for lenders may see these rates rise a touch, although competition in this market should stay strong.”
An additional layer of complexity is that the rules themselves are also something of a grey area, as Mr Boulger explains: “Say, you’re a landlord with 20 properties – 18 of which have adequate rental income, but two of which don’t. Despite your other 18 properties making surplus rents to cover the two mortgages that aren’t, does the lender look at the total picture? Or does the lender look at the properties on an individual basis? The rules are open to interpretation.”
Mr Montlake adds: “The issue here is that this becomes a very grey area that will differ substantially from lender to lender, meaning a quick ‘agreement in principle’ from a lender will be a thing of the past.
“Some lenders, for example, may decline anyone who has a house in multiple occupation (HMO) or a student let in their portfolio as it is not something they feel comfortable with, while others will be much more relaxed.”
Bigger lenders will remain in the market
When Moneywise asked some of the major buy to let lenders if they’ll continue to lend to landlords with four or more properties, they told us:
- Accord (part of Yorkshire Building Society): Will continue to lend to portfolio landlords using its “existing rental calculations”. It adds that there will be “no changes to loan to value (LTV) limits, maximum loan size or minimum income criteria, while stress rates and the number of properties accepted will remain the same”.
- Aldermore Bank: Will continue lending to portfolio landlords with no change to stress rates, LTVs or income criteria. It will, however, split portfolio landlords into two categories: those with up to 10 buy to let mortgage properties, and those with 11 or more buy to let mortgage properties. Those in the 11 or more category must have a face-to-face interview with the lender and supply additional evidence, including a 12-month cashflow forecast.
- BM Solutions (part of Lloyds Banking Group): Will lend to portfolio landlords but it’s yet to confirm its lending criteria – it says it will do this when it begins training staff on the new rules from 21 August.
- The Mortgage Works (TMW) (part of Nationwide Building Society): Will continue to lend to portfolio landlords. It says: “There will be no changes to loan to value (LTV) limits, maximum loan size or minimum income criteria, while stress rates and the number of properties accepted will remain the same. TMW will continue to accept portfolios of all sizes, with no limit to the number of properties.”
Tips to beat tighter lending criteria now
However, act now and you can beat the tighter lending criteria; three mortgage experts share their top tips with Moneywise:
1. Get your paperwork in order
Mr Montlake says: “Those applying for a mortgage after September are going to be in for a shock in terms of the amount of paperwork that lenders are going to require in order to assess their application, as it is no longer going to be a case of just assessing the security property itself.
“It is therefore imperative that landlords get their tax affairs in order quickly and utilise advice from a properly qualified accountant and not just a part-time book keeper.”
2. Consider remortgaging now
David Hollingworth, associate director of communications at mortgage broker London and Country, says: “Those who want to continue with their portfolio or grow it in future may want to take advantage of low rates now in a market they already know and understand what the options are.”
Mr Montlake adds: “For those with equity in their portfolio it makes a lot of sense to look at remortgaging while rates are low and pulling out equity to help speed up any future purchases.”
Mr Boulger echoes these sentiments: “ My advice to landlords is if you know you need to re-mortgage by the end of the year or early next year, get in sooner rather than later and you avoid both those risks [higher prices and slow lender responses]. Remember, mortgage offers last three months.”
He adds that landlords may also want to consider a product transfer instead of remortgaging. Mr Boulger explains that this is where you get a different product with the same lender, but the terms stay the same and you’re not borrowing any more money. A remortgage on the other hand is where you’re getting a loan on the same property with a different lender.
The PRA’s rules are the latest in a string of changes to hit buy to let landlords over the last few years, and they may be the final straw for some landlords. Mr Hollingworth says: “Changes to tax relief in conjunction with this new lending criteria should prompt landlords to consider whether they’ve got the right level of property risk or whether they should offload their properties.”