Earlier this year, the Prudential Regulation Authority (PRA), which is part of the Bank of England (BoE), launched phase one of its underwriting changes for buy-to-let mortgages. The upcoming phase two will include portfolio underwriting changes for landlords who own four properties or more.
Phase one introduced stricter affordability tests for lenders to impose on landlords, including a stress test on interest rate rises.
All those in the mortgage and property investment markets must be aware that, from 30th September 2017, phase two will be launched.
The PRA will require changes to the way that mortgage applications are underwritten for portfolio landlords – those with four or more mortgaged buy-to-let properties. The reason for this measure is that the PRA has found that mortgage arrears rates increase as landlords’ portfolio sizes grow.
Any borrower that falls into the portfolio landlord category will be required to pass specialist affordability checks when the portfolio underwriting changes are introduced.
The PRA has not outlined a specific requirement for lenders, but has detailed that they should take the following into account: a landlord’s experience; their full portfolio; their rental income; any outstanding mortgages; their assets and liabilities. They should also take into consideration the merits of any new lending in accordance with the landlord’s business plan, alongside historical and future expected cash flow.
The PRA is not concerned with recent landlord tax changes.
If you’re a portfolio landlord, lenders will need to make sure that you are not over-exposed and will therefore stress your background portfolio from 30th September. This means that they will take your entire property portfolio into account when making a decision on your mortgage application.
At present, not all lenders have outlined how they will apply the PRA’s guidelines, but you can expect them to assess the following:
- Your property investment experience
- The total amount of mortgage borrowing you have across your 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 your portfolio and elsewhere
When applying for another buy-to-let mortgage, you should be prepared to be asked for the following: your up-to-date property portfolio spreadsheet; a business plan; cash flow forecasts; your last three months’ bank statements; submitted tax returns; and potentially income and expenditure statements for your portfolio.
If you are a portfolio landlord and plan to take out another buy-to-let mortgage, you must be ready for the additional tests.
To be in the best position, we advise getting your paperwork in order and ready for the application process. As ever, it’s important to keep your property portfolio spreadsheet updated.
If you are planning to review your portfolio, it’s probably a good idea to do this sooner rather than later.
Whatever your plans, be aware and ready for the portfolio underwriting changes!