New buy-to-let (BTL) rules are set to come into force this weekend, which will see stricter lending criteria applied to so-called 'portfolio landlords'. But just what are the changes on the horizon, and how could you be affected?
The rules, due to take effect from 30 September, will impact those with four or more mortgaged BTL properties, with these portfolio landlords set to be 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) is implementing tougher stress tests and affordability assessments for these landlords to differentiate between 'simple' and 'complex' buy-to-let, which means lenders will have to review an entire portfolio when making a decision on a single buy-to-let mortgage application.
Details of all BTL properties you own will need to be disclosed as part of every application, including all income, expenditure and wear and tear, as well as details of all other mortgages, and all will be stress tested at the same rate of 125%. Essentially, you'll no longer be assessed on the affordability of a single property you wish to buy or remortgage, but on your entire portfolio, with it being viewed as a single entity.
The rule changes could make it harder for portfolio landlords to secure finance, as if a single property in your portfolio is underperforming, 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 now have an impact on any mortgage application for the portfolio as a whole, meaning it could 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'll be 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 could 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 when the new rules come into effect, but it can't be denied that it'll be more difficult.
And that's always assuming lenders are still willing to offer such mortgages – there's a chance that some will retreat from selling BTL mortgages to portfolio landlords given the extra red tape and administration involved, and not much detail has been disclosed about how they'll cope with the new changes.
Hopefully, it shouldn't have too much of a wider impact on the market, with research from Kent Reliance showing that just 14% of mortgage brokers think the changes will reduce BTL transactions. It could even lead to a whole new market, with speculation mounting that some lenders will split their mortgage ranges into those applicable to portfolio landlords and those with three or fewer properties.
Nonetheless, it could still have an effect, at least for the time being: 29% of respondents to Kent Reliance's survey anticipate that more applications will be rejected in the short term, while 23% believe the extra administrative burden will cause the application process to slow down, and just 4% predict that it will have no impact at all.
If you're a portfolio landlord, it could be time to take a close look at your properties and how they're performing. If they're all above-target, great – but 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.
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