Posted on 11 August 2017 by
With phase 2 of the Prudential Regulation Authorities’ (PRA) buy to let recommendations fast approaching, lenders have at last started to share their proposed approach to underwriting portfolio landlords.
The PRA produced a supervisory statement in September 2016 entitled “Underwriting standards for buy-to-let mortgage contracts” which outlined the minimum standards that firms should use to underwrite buy to let mortgage contracts.
Phase 1 of this statement explained the stress tests and interest cover ratio that the PRA expected firms to use when assessing buy to let affordability and this came in to force 1 January this year with many lenders moving from the previous industry standard of 125% at a 5% stressed interest rate to 145% at 5.5%.
Whilst this phase had an impact on affordability and in turn borrowing capacity for all landlords, Phase 2 has focused specifically on “portfolio landlords” and the approach to underwriting applications for this type of client.
The PRA have defined portfolio landlords as any investor holding four or more distinct mortgaged buy to let properties, either together or separately in aggregate and their recommendations state that lenders must apply a more “robust” approach to underwriting portfolio landlord applications.
Until recently it was unclear exactly how lenders would implement these recommendations but thankfully, some of the key lenders in the buy to let sector have finally released their underwriting guidelines.
TMW have dedicated an entire page on their website to the proposed changes. In summary TMW intend to run a full affordability assessment on a borrower’s entire property portfolio to ensure it meets their Interest Cover Ratio (ICR) of 145%. What is not clear at this stage is whether this will be applied as an aggregate test i.e. does the entire portfolio meet the ICR requirement of whether each individual property will; have to meet the test on its own.
If the latter applies, this could mean that a landlord will be unable to borrow with TMW if they happen to have one poorly performing property in their portfolio.
In addition to this increased affordability assessment, landlords will be asked to provide 3 months personal bank statements and a portfolio schedule and depending on the complexity of the of the case, they may be required to provide proof of personal income, an asset and liability statement and a business plan.
Aldermore have chosen to split portfolio landlords in to two categories to determine what further information needs to be provided to underwrite the individual case. Any landlord holding 10 or less mortgaged buy to let properties with Aldermore will be required to provide a portfolio schedule and business plan in addition to normal underwriting requirements whilst those with 11 or more mortgaged properties with the bank will also be required to provide a 12 month cash flow forecast statement and an asset and liability statement. In addition, for cases where a landlord has 11 or more properties mortgaged with Aldermore or total borrowing with Aldermore is £1 million or more, a face to face interview will be required.
More recently, both Santander and Accord have confirmed that they intend to continue lending to portfolio landlords despite this sector representing a smaller percentage of their overall mortgage lending.
Whilst Accord have suggested they will take a similar approach to TMW with a full portfolio affordability assessment – albeit as a more favourable 135% at 5% stress test – Santander will apply their normal stress tests but have chosen to restrict lending to portfolio landlords to like for like remortgages only.
This means any portfolio landlords looking to purchase a new property or capital raise from their existing properties will no longer be able to approach Santander.
Depending on which category of landlord you fall into, the changes coming in to force at the end of September may or may not have an impact on your future plans.
Those lenders choosing to withdraw their offering to portfolio landlords, may look to fill the gap this causes in their lending volume by increasing market share with non-portfolio borrowers. This in turn could mean better rates and criteria in attempt to attract new business.
As for portfolio landlords, is seems clear from the information we have received so far that obtaining a new mortgage or remortgage after September will not be as straight forward as some landlords may be used to.
With this in mind, those landlords that have obtained suitable tax advice and wish to continue their portfolio expansion need to decide if they remortgage equity out now, under the process that they are used to, or wait until after September 2017 when the outcome is less clear.
If you’re a landlord and you’d like to talk to us about you BTL portfolio call us now on 0344 346 3672 or submit an enquiry here
Categories: Buy to let
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