Playing the Buy To Let game with new rules...
20 March 2018
The notion that there is money to be made from property has been instilled in/suggested to many of us from an early age.
As children, we would roll the dice, pass ‘Go’ and set off in a businesslike manner past The Old Kent Road with pound signs in our eyes.
And, after circumnavigating the Monopoly board ad nauseam, the potential rewards from rental income would become quite apparent.
Wind the clock forward a few years, and some opt to play the property game for real – although it can still be a proverbial roll of the dice, especially for the inexperienced ‘player’.
Buy-To-Let has traditionally been regarded as an attractive proposition for those with enough money to invest, driven by the old maxim that ‘bricks and mortar’ are a safe bet.
Couple that with – in recent years – the impact of historically low interest rates on savings, the contrasting effect on mortgages, along with the volatility of the stock market, and the popularity of investing in property soared.
Like any investment, however, there are no guarantees.
Over the past two years, increasing tax liabilities have depressed landlords’ yields, with the tapered reduction of tax relief on buy-to-let mortgage interest already eating into owners’ profit margins.
And, unlike Waddingtons, the Regulator/Prudential Regulation Authority has also recently re-written the rules on multiple ‘Buy To Let’ property ownership.
From September 2017, landlords with four or more buy-to-let properties have to satisfy different criteria to secure mortgage borrowing, as they are now considered ‘portfolio investors’ under the new rules.
In order to comply with the landlord underwriting standards, lenders now look at the total income-versus-borrowing across all of a landlord’s properties, to ensure that any new borrowing doesn’t adversely affect affordability for other properties within the portfolio.
This means more work for lenders, who have to investigate each mortgaged property held by the landlord in more detail, then apply an Interest Coverage Ratio (ICR) across the portfolio.
Whilst not necessarily being a ‘game changer’, the impact of the increased underwriting required to implement these measures has certainly led to some smaller building societies/lenders announcing that, for the time being, they will not provide buy-to-let mortgages for investors with four properties or more.
Staffordshire-based Leek United Building Society is one of the notable exceptions, offering Buy-to-Let Portfolio Mortgages within its long-standing, regular BTL products.
“In the early days of Buy To Let, things were relatively simple; people saw it as an opportunity of making a profit, so they would buy a property, ‘do it up’ and rent it out,” said Mark Schofield, the Society’s Head of Credit Risk.
“A lot of folk have got involved in the market at varying levels – but equally, many people had no experience in managing a property portfolio.
“The Regulator has now ruled that multiple BTL property ownership be considered as a business, to be underwritten as such.
“But when this came in last September, a lot of people with three properties and looking to buy a fourth or looking at re-mortgaging their portfolio were taken by surprise…”
There are some key considerations for prospective BTL portfolio landlords to now take on board – not least of which, the application process will undoubtedly take longer.
This means planning well ahead and making sure lenders have three months or more to make the checks they need.
Landlords now also need to provide their lender with much more detailed information as part of the application process.
This is likely to include, for every property they own:
- Current mortgage borrowing
- Rental income
- Related outgoings
- Rental profits
- Tax and business returns
- Other financial assets held
- Personal income
Mark continued: “Very often, BTL portfolio applications can fail because borrowers have not prepared adequately; it’s now considered as ‘a business’ – and no lender worth their salt would commit to lending funds on the basis of a business plan that wasn’t financially sound.
“We ask for things like information about the borrower, their experience as a BTL landlord, what properties they have, mortgage payments, what rent they charge, a list of tenants etc.
“We’ve also developed a pack which helps the applicant, and they have to do a cash-flow history and a property forecast.
“The bottom line is, preparedness is the key. Some people apply and think they can find an easier, quicker route; there isn’t one…”
