The Prudential Regulation Authority (a division of the Bank of England) is stiffening buy-to-let underwriting requirements in an attempt to make lenders stricter when deciding whether or not to provide a loan.
The new regulations will take affect as of 30 September 2017 with the aim of stopping inappropriate lending and the potential for excessive credit losses.
What the new regulations involve
Lenders will be required to use an affordability test when assessing if a landlord qualifies for a buy-to-let mortgage. There are two tests that the lender will need to measure against:
an interest coverage ratio (ICR) test and/or an income affordability test.
The ICR is the ratio of the expected monthly rental income from the buy-to-let property to the monthly interest payments. Currently the standard minimum threshold lenders work with is 125%.
The income affordability test will be applied when personal income is being used to support the rent. The test will see whether the income, combined with any income from the property, is enough to support the mortgage repayments.
- ALL buy-to-let mortgages regardless of whether the borrower is an individual or limited company.
- Portfolio landlords (landlords who have four or more mortgaged properties). Lenders will be expected to have a specialist underwriting process in place for these landlords.
What it means
Landlords will be required to provide detailed income and mortgage information on each of their properties every time they refinance or purchase a new property.
For example, when assessing the minimum ICR requirements, lenders will have to consider all costs associated with renting out the property, such as management and letting fees, council tax, service charge, repairs, utilities, gas and electrical certificates, and ground rent.
Whereas, for the income affordability test, all types of income will be considered: employment, rental income on all properties, pensions, savings and investments.
Therefore, landlords will be expected to provide more information when refinancing or taking out a new mortgage, such as:
- Bank statements
- Tax returns
- Rental accounts
- Income and expenditure statements
- Historical and forecasted cash flows across the portfolio
Not only will landlords need to provide more information, but with the increased level of admin, costs for the lenders will also increase, which will in turn be passed onto borrowers. Consequently, landlords could see mortgages become more expensive.
There is no solution to the new regulations as all borrowers are affected – individual landlords as well as limited companies. Therefore, all we can advise is that if you are thinking about taking on another mortgaged property after 30 September 2017, that you make sure you are keeping on top of all of the necessary information. Property management software’s really help with this and will save you time when you are ready to apply.
Furthermore, with Making Tax Digital on the horizon too, the majority of landlords will have to review how they are tracking their financial information anyway. This is because they will be expected to submit quarterly information to HMRC. Therefore, it makes sense to review your processes earlier to ensure you comply with both sets of regulations.
For further advice or if you would like me to recommend a property management software for you, contact me at email@example.com.