New buy-to-let (BTL) rules were introduced at the end of September 2017 which saw stricter lending criteria applied to so-called 'portfolio landlords'. But just what are these new rules and how will you be affected?
The rules affect those with four or more mortgaged BTL properties, with these portfolio landlords now being subject to specialist – and some might say stricter – underwriting processes when applying for a mortgage.
The Bank of England (or more specifically, the Prudential Regulation Authority) implemented tougher stress tests and affordability assessments for these landlords to differentiate between 'simple' and 'complex' buy-to-let – meaning lenders must review an entire portfolio when making a decision on a single mortgage application.
Details of all BTL properties you own must be disclosed as part of every application, including all income, expenditure and wear and tear, as well as details of all other mortgages. All these are then stress tested at the same rate of 125%. Essentially, you are not being assessed on the affordability of a single property you wish to buy or remortgage, but rather on your entire portfolio, with it being viewed as a single entity.
The rule changes can make it harder for portfolio landlords to secure finance, as if a single property in your portfolio is under performing, it could tarnish the rest.
Let's say you had a portfolio of six properties, five of which are profitable and generate rental income in excess of mortgage repayments. The remaining property doesn't, but the shortfall is covered by the other five. This poor performance will have an impact on any mortgage application for the portfolio as a whole, meaning it can be more difficult to secure finance, particularly if you want higher loan-to-value mortgages on low-yielding properties.
Then there are the more general affordability criteria – you are expected to show that you can afford the repayments if interest rates were to hit 5.5% and may also be required to show a business plan, which can add another layer of difficulty to the process.
Provided you can prove affordability across your portfolio, you should still be able to secure a BTL mortgage under the current rules, but it can't be denied that it is more difficult than previously.
Take a close look at your properties and how they're performing. If one isn't as profitable as it should be, it could be time to start thinking of ways to boost its potential if you want to stand the best possible chance of securing finance in the future.
Our buy-to-let rental yield calculator shows how much your rental yield might be based on your property's value and expected rent.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.