30th September 2017 witnessed a sea change in financing rules for buy to let. New PRA (Prudential Regulation Authority) guidelines were introduced for landlords. But many affected are unaware of what is to happen. The rulings were particularly focused on buy to let landlords and lending requirements. One Savings Bank carried out a survey of 200 buy to let landlords which revealed:
• 31% knew about the changes but were unsure about how to apply them
• 13% knew about the changes but not the date they would be employed
• 2% were not aware there were any changes
The overall aim of the new regulations is to minimize the amount of irresponsible lending within the buy to let sector. As of September, tougher requirements and expectations will be given to lenders. This includes the interest rates-dependent ‘stress test’ on new mortgage applications.
What is the Stress Test?
The stress test has brought about issues for many landlords who want to expand their mortgages, or indeed obtain new ones. The stress test ensures lenders check a landlord’s genuine ability to afford repayments. In particular if the Bank of England base rate was ever to hit the long term average of 5.5% once again. Additionally, lenders may ask to see a business plan. This would need to evidence some insight into how the sector worked and where the purchase of a new property was going to be a sound investment. Among certain circles there is even talk that some lenders may stop selling buy to let mortgages, putting landlords in a difficult position.
What do these new PRA guidelines mean for buy to let landlords?
If you are classed as a ‘portfolio landlord’ you will most likely face further changes. A ‘portfolio landlord’ is a landlord who has four or more separately mortgaged rental properties. You may have to submit additional information and/or receive extra checks under the new guidelines. Again, all of this points to heavier scrutiny at a time when landlords are already being targeted by the government. Landlords will be presented with an affordability assessment, which will ask detailed questions about their personal income. Further, a rental income check will be carried out regarding both current and future rental rates. Perhaps the best advice we have come across is that your tax returns should be filed promptly so that they are always up to date. You can find out a great deal more here.
What will be evaluated for buy to let mortgages?
When considering a single property application, lenders may decide to evaluate:
• Your entire portfolio
• How much experience you have
• Your assets
• Any liabilities – this includes outstanding mortgage balances and future tax implications
• Business plans
• Cash-flow statements
As lenders will be looking into your whole buy to let portfolio, any less profitable property may cause issues.
What should buy to let investors be doing?
As the new regulations were announced many were advising to review and where necessary switch mortgage products before the summer. However, this time has now passed. For the more sensible landlord the new regulations should not cause too much trouble.
As with most things these days the world is becoming more complicated and regulations are growing. Landlords who are planning to expand their property portfolios will no doubt need to become more rounded in their overall business knowledge. This will mean getting to grips with accounting and tax laws to some extent whilst at the same time as keeping one eye on the buy to let mortgage rules.