In September 2016 the Prudential Regulation Authority (PRA) released its Supervisory Statemen SS13/16 outlining new underwriting standards for buy-to-let mortgage contracts.
This was the paper that prescribed a new, stricter approach to buy-to-let affordability testing, which was introduced in January 2017, and also new rules regarding the underwriting of portfolio landlords. The deadline for implementation of these portfolio landlord rules was 30 September 2017.
What is a portfolio landlord?
The PRA considers that borrowers with an interest in four or more mortgaged buy-to-let properties should be treated as ‘portfolio landlords’.
Unencumbered properties do not count, so if an investor were to own three buy-to-let properties outright and three buy-to-let properties with a mortgage, they would not be classed as a portfolio landlord by the PRA, even though they own six investment properties altogether.
What do the rules say?
The PRA says that 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.
As such, it states that lenders should take a specialist approach underwriting portfolio landlords that considers the landlord’s circumstances, their portfolio and alternative sources of income.
The PRA provides examples of additional information firms may request from the borrower, including:
- The borrower’s experience in the buy-to-let market and their full portfolio of properties and outstanding mortgages
- The assets and liabilities of the borrower
- The merits of any new lending in the context of the borrower’s existing buy-to-let portfolio together with their business plan
- Historical and future expected cash flows associated with all of the borrower’s properties
What does this mean?
Essentially, for landlords who own four or more investment properties with a buy-to-let mortgages, an application for any new buy-to-let lending will require the lender to assess the stability of the landlord’s own circumstances and the rest of their portfolio in addition to the affordability on the property on which they are looking to secure a mortgage.
How have lenders interpreted the rules?
The problem for brokers is that lenders have interpreted the guidelines in different ways and this has made it harder for brokers to understand what is required.
So, for example, if a landlord has five properties generating enough rent to cover the mortgage payments, but one property that isn’t, their mortgage application may not be approved by one lender but could be approved by another.
This means the way that brokers have traditionally placed buy to let cases, based on a straight forward calculation, is no longer appropriate for portfolio landlords.
Lenders each have their own interpretation of the guidelines and have applied stress tests in different ways, with different documentation requirements. As such, sourcing systems are not equipped to provide the full picture.
Is it still possible to secure a mortgage for portfolio landlords?
Absolutely, there are still plenty of options for portfolio landlords, including limited company mortgages, top-slicing, bespoke deals with rolled up or deferred interest and short-term loans. It’s a competitive market and there are lots of lenders that want to lend, but when it comes to placing a case for a portfolio landlord, it is important to remember a few basics.
What do brokers need to remember?
The new rules and the way in which they have been interpreted by lenders might seem daunting, but placing a case for a portfolio landlord can be straightforward if you remember a few things:
- Don’t think about the property in isolation, you need consider the bigger picture.
- Obtain a portfolio document upfront, detailing the properties in the portfolio, mortgage and repayment information and rental income. This is the most important thing to remember and the bare minimum for any portfolio buy-to-let application. You should encourage all of your landlord clients to maintain a document lie this.
- Take the time to understand lender criteria and the options available. Don’t just rely on the cheapest rate on a sourcing system – criteria is key. If you don’t have the time to fully research the market, think about working with an expert to help place the case. At Brightstar we receive a lot of enquiries from brokers who recognise the value of our intellectual capital and want to work with our experts who have the experience in assessing portfolios and identifying what information is missing. If a case can be presented to a lender with all of the minimum packaging requirements, it can cut delays, and this makes the process less onerous for brokers.
- If you still find you don’t have the time to get to grips with the market, think about referring the business to a specialist distributor like Brightstar that can take on the advice for the client and you will still retain a share of the proc fee. If you refer a client to Brightstar you will retain ownership of the client, which means that you will still earn a share of the proc fee on any cases they complete in the future.
Have the new rules created any opportunities?
The PRA guidelines have made the process for portfolio landlords more complicated, but they have also presented some opportunities.
If you don’t already have a referral relationship with a property tax specialist, you should look into this as soon as possible. Not only is it best advice to point your clients in the direction of a qualified specialist, but you could also benefit from referrals being made to your business.
Reviewing a landlord’s portfolio as a whole can also presents more imaginative opportunities for raising finance. By looking at the overall portfolio there could be opportunity to raise finance elsewhere on properties at lower LTVs if this is the appropriate solution for the client, or even across multiple properties.
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