Today has seen the publication of the Prudential Regulation Authority’s, (PRA’s) proposals for lenders on how they should be underwriting Buy to Let mortgages.
The Buy to Let market has been subjected to some intense scrutiny over the past few months and landlords may be forgiven for feeling a little persecuted.
In essence attempting to set out a minimum set of requirements for lenders when assessing Buy To Let applications is no bad thing, but there has been a worry that if this brief was taken too far, the end result would be to drive more landlords out of the market and cause some of the very issues the Bank of England are trying to avoid.
This set of guidelines will have an effect in dampening the growth of the Buy to Let market, but has stopped short of an all-out assault.
Whilst there is no set of defined rules limiting maximum Loan-To-Values, lenders will now have to apply a stress test rate of at least 2% above current rates in the first 5 years of the loan with a minimum of rate of 5.5%, a figure that many lenders have already started to work towards.
This will have more of an effect in areas such as London where this will effectively limit loans on more expensive, lower yielding properties to around the 60% loan-to-value level.
Landlords will also face more invasive questions around their personal income and will have to take into account more of the costs associated with owning an investment property such as management fees, repairs, void periods and service charges which will all impact on landlords borrowing capacity.
An important aspect of this will be taking into account forthcoming tax changes which for some borrowers could make the difference between making a profit or making an overall loss.
Portfolio landlords, who are now defined as any landlords with more than four properties, will be subjected to more precise underwriting taking into account their full portfolio, geographical concentrations and their overall experience as well as looking at the merits of new lending to them.
Whilst many landlords will undoubtedly throw their hands up in the air at these more strenuous checks and procedures we are unlikely to see all these rules dampen the demand of landlords too much, instead curbing the pace of growth in the buy to let market rather than putting up a brick wall and causing a head on crash.
Some of the proposals are listed below:-
- Ensure all lenders check landlords’ incomes properly
- Stress testing should take in to account a 2% rise in interest rates over the first 5 years of the loan, but with a minimum interest rate of at least 5.5%
- When assessing the minimum Rental Cover threshold, consideration should be given to the following costs where the borrower is responsible for payment: management and letting fees, council tax, service charge, insurance, repairs, voids, utilities, gas and electrical certificates, licence fee, ground rent and any other costs associated with renting out the property
- They should also take into account rising taxation on buy-to-let investments
- Portfolio landlords are defined as those with more than 4 properties
- For portfolio landlords, lenders will be expected to assess the borrower’s experience in the market including their full portfolio of properties and any outstanding mortgages, the assets and liabilities of the borrower and the merits of any new lending in the context of the investor’s existing portfolio
- Costs arising from multiple tenancies and potential risks of property and geographical concentrations as some of the more complex characteristics of portfolio buy-to-let lending
A link to the full report is here .