Tougher lending rules for landlords come into force in two weeks – but what effect are they likely to have, and how can you prepare your investments for the changes?
From the end of the month, the Bank of England’s Prudential Regulation Authority will start to enforce stricter lending regulations for landlords with four or more properties.
While the new rules won’t affect everyone, they’re likely to make borrowing more difficult for landlords with larger portfolios.
Buy-to-let rules: what’s changing?
The new rules will only apply to landlords who have four or more properties with existing buy-to-let mortgages.
When you apply for a new mortgage, you’ll now need to show full financial information for every property in your portfolio, rather than simply providing your top-line profits.
This means that, among other factors, lenders will look at the equity in each property, individual rental profits and the geographical spread of your portfolio.
The changes could make borrowing additional funds more time consuming, especially for large portfolios – imagine having to assess fifty properties individually. It could also result in some landlords getting turned down for finance, especially if they are heavily mortgaged or overly invested in a specific local market.
How much rental income will I need?
When assessing your application, lenders need to see you’re bringing in enough rent to act as a buffer if something goes wrong. With this in mind, the lender will judge your rental income using a threshold known as an ‘interest cover ratio’.
The interest cover ratio calculates how much of a landlord’s mortgage payment is covered by a property’s rental income. If you have a mortgage of £800 per month, and you rent it out for £1,000, your interest cover ratio will be 125%.
Previously, landlords were able to show that their overall rental profits met the interest cover threshold for their total mortgage payments. Now, each individual property will need to meet the bank’s minimum ratio.
We don’t yet know how each buy-to-let lender will adapt their rules to reflect the new regulations, but a few have already announced their plans in relation to rental income.
So far, we know that OneSavings Bank will lend at a minimum ratio of 125%, Yorkshire Building Society will use 135%, and Lloyds, Nationwide and Skipton will operate at 145% – a figure that could cause problems for landlords with low-yield portfolios.
Find out more: Becoming a landlord – the ins and outs of buy-to-let
Do I need to do anything?
If you’re a portfolio landlord, you won’t need to do anything until you want to take out a new buy-to-let mortgage or remortgage one of your current properties.
When you next apply for a mortgage, you’re likely to need to supply detailed financial information on each property you hold. How much information you’ll be asked for depends on the lender – but it’s best to get your documents in order now, especially if you’ve got a lot of investments.
While it’s by no means exhaustive, the list below highlights some of the main things lenders will ask for.
Why is the Bank of England intervening?
The Bank of England has long been concerned about the buy-to-let market overheating – and these changes mark the latest intervention. The new rules were first announced as early as last November, but will apply from 30 September 2017.
Landlords have also faced other challenges to their profit margins in recent years. In April 2016, the government introduced stamp duty hikes for buy-to-let buyers, while mortgage interest tax relief changes are being phased in over the next three years. These measures were designed to slow down buy-to-let investment and free up housing for home buyers, reflecting the Bank of England’s concern that an unstable buy-to-let sector could damage the country’s economy as a whole.