New affordability rules come into force today for landlords with four or more properties – but which lenders are coming down hardest?
As the Bank of England’s Prudential Regulation Authority begins to enforce stricter stress testing for portfolio landlords, lenders are revealing how they’ll deal with the new regulations – and at this stage it’s a mixed bag.
While some banks are bringing in new systems to deal with more complicated underwriting processes, others are dropping out of the buy-to-let market entirely.
Which? explains how the new rules could affect you, and which lenders remain open for business to portfolio landlords.
- If you’re investing in property, a mortgage broker could help you get a better deal. For impartial, expert advice on finding the right buy-to-let mortgage, call Which? Mortgage Advisers on 0808 252 7897.
Tighter restrictions on portfolio borrowing
It’s important to point out that the changes only affect people defined as portfolio landlords – those with four or more mortgaged buy-to-let properties.
From today, lenders will need to assess the financial viability of every property in a landlord’s portfolio when deciding whether to offer them a further loan.
Previously, landlords could provide information about their overall accounts. Now, they will need to show mortgage details, cash flow projections and business models for every property they own when applying for a new loan.
Affordability will also be more tightly tested. When landlords apply for new borrowing or to remortgage their current properties, their monthly rental income will now need to cover 125% of their mortgage payments, stress tested at an interest rate of 5.5%.
How are lenders reacting to the PRA changes?
There’s a great deal of variety in how individual lenders are responding to the prospect of tighter affordability checks.
For example, while Barclays says it will only impose very small changes, other lenders are tightening their interest cover ratios – the percentage of interest which rental income can pay off. Two lenders – Santander and Platform – won’t be offering any new lending to portfolio landlords at all.
The table below shows a marked difference in how major lenders will use cover ratios and interest rate stress testing to assess affordability.
|Barclays||Minimal changes. Borrowers will need to fill out a ‘property schedule’ to provide extra information to specialist underwriters.|
|The Mortgage Works (Nationwide)||145% interest cover ratio, stress tested at an interest rate of 4.5% (10 or fewer properties), or 5.5% (11 or more). No like-for-like remortgages for portfolios with fewer than seven properties. New online application system and dedicated team for brokers.|
|BM Solutions (Lloyds)||145% interest cover ratio, stress tested at 5.5%. Up to 10 buy-to-let properties allowed (three with Lloyds). New underwriting system launched.|
|Platform (Co-operative)||No lending for portfolio landlords – loans only available to those with three or fewer properties.|
|Santander||No further lending for portfolio landlords who want to increase their borrowing, like-for-like remortgaging available in some cases.|
|Accord||135% interest cover ratio. No significant changes.|
|Coventry Building Society||125% interest cover ratio, stress tested at 5.5%, with a maximum 65% loan-to-value ratio across the entire portfolio. No property in portfolio allowed to fall below an interest cover ratio of 100%.|
|Leeds Building Society||Introduction of a ‘portfolio landlord declaration form’. Cashflow details will be required in more complicated cases, and lending decisions should be made within 24 hours.|
|Paragon/Mortgage Trust||Minimal changes, already implemented well in advance. Paragon will exclusively handle applications from portfolio landlords.|
How will this affect the buy-to-let market?
At this stage, it is impossible to predict for certain how the buy-to-let market is likely to react. It’s possible that the process of getting a new buy-to-let mortgage will slow down as lenders adapt to more time-consuming affordability checks, and interest rates may rise due to less competition between lenders.
Some landlords may seek to incorporate their portfolios to side-step the changes – although doing this triggers the prospect of stamp duty and capital gains tax bills.
Enhanced affordability checks could cut down on risky borrowing, as the Bank of England raises concerns about an overheated buy-to-let sector.
David Blake of Which? Mortgage Advisers says: ‘We are seeing many lenders now adopting a more holistic approach to their lending by using personal income in the assessment of buy-to-let applications’.
‘In theory this is a good thing, although it will involve more paperwork for those affected – and this could lead to higher fees and higher rates.’
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