A buy to let landlord who owns four or more properties will have found mortgage underwriting for a portfolio has changed since 2017.
PRA changes Phase I
From January 1st, 2017, the PRA (Prudential Regulation Authority) required lenders it regulated, to secure stronger proof that borrowers could afford mortgage repayments.
Before then, many lenders asked borrowers to cover 125% of monthly payments with rental income. Many lenders may now ask: will your rental income cover 145% of the monthly mortgage payment?
Affordability calculations use a rental coverage percentage greater than 100%. They also use an interest rate set higher than the actual rate of repayment.
This “stress rate” calculates if a mortgage remains affordable if rates were to rise.
Five-year fixed buy to let mortgages may not be subject to tighter affordability calculations.
Each lender has taken a different approach to the PRA changes. Some lenders are not PRA regulated and as such are not subject to the changes in the same way.
PRA rules for portfolio landlords
The PRA explained its closer scrutiny of portfolio landlord mortgage applications, in Supervisory Statement (SS13/16), ‘Underwriting standards for buy-to-let mortgage contracts’:
“The PRA expects firms to recognise that existing experience and skills acquired in buy to let lending do not automatically translate into equivalent skills when assessing portfolio landlords.
“Lending to portfolio landlords is inherently more complex given the quantum of debt in aggregate, the cash flows and costs arising from multiple tenancies and potential risks of property and/or geographical concentrations.”
September 30th changes
The PRA changed mortgage affordability assessments for portfolio landlords.
Property owners defined as ‘portfolio landlords’ own more than 3 buy to let properties.
In the past, affordability calculations looked only at the property that the borrowing was against.
Affordability is now calculated from all portfolio landlord-owned properties.
The landlord may not be able to borrow the required size of loan, if any properties in the portfolio negatively impact the affordability calculation.
This is because a higher level of outstanding debt across a portfolio, represents a greater risk to the lender, if house prices fall.
Portfolio landlords looking to remortgage, face the same challenge.
Lenders applied different approaches to the new rules, making buy to let more complex for portfolio landlords.
PRA-regulation lenders assess all the borrower’s properties when calculating affordability, including those with no mortgage.
Some lenders expect each property in the portfolio to meet their internal rental stress assessment.
The Portfolio application process
A portfolio landlord will usually have to produce more paperwork for an application.
Some of the documents asked for, may include:
Three months of bank statements; plus:
- Existing Property Declaration Form;
- Assets and Liabilities Schedule / Statement
- A business plan
The challenges for portfolio landlords have increased, but the rewards can be lucrative. Many portfolio landlords are among the most successful in the private rental sector.