The financial landscape for landlords is changing due to new measures introduced by the Prudential Regulation Authority.
The first roll-out was in January this year and the second tranche will be embedded by 1st October 2017.
In essence, the changes will require lenders to ensure they have a fuller picture of the borrower, and a complete understanding of their financial and tax position with regard to their investment portfolio.
These are the key highlights of new criteria:
- Affordability assessments should take into account: borrower’s costs including tax liabilities, verified personal income (where used by the lender) and possible future interest rate increases. When setting the expectations for future interest rate increases, the PRA reviewed the prevailing standards in the industry and considered the impact of changes in interest rates, and calibrated the stressed rate accordingly.
- Lending to portfolio landlords (defined by the PRA as being those with four or more mortgaged buy-to-let properties) should be assessed using a specialist underwriting process.
- The PRA wishes to clarify that the provision in Capital Requirements Regulation (CRR) which reduces the capital requirements on loans to small and medium-sized enterprises by around 25% should not be applied where the purpose of the borrowing is to support buy-to-let business.
- An implementation timeline of 1 January 2017 for the more straightforward changes, and 30 September 2017 for the remainder.
- Allowing firms to assume reasonable rental increases when assessing affordability in the context of possible future mortgage interest rate increases.
- Excluding those re-mortgaging (and not increasing borrowing) from the supervisory statement, in a similar way to residential lending.
- Reflecting the change to mortgage interest tax relief announced by HM Government in 2015, which has already led to several firms increasing their interest cover ratio affordability thresholds. The PRA has reaffirmed its expectation that firms should also take these new costs into account when assessing affordability.
Here is the Document in full
and the associated Policy statement
The correct deal stacking calculation is now:
Monthly rent x 12 divided by 5.5% divided by 145%
This will show you how much borrowing the rent will support to give a rough idea of what you can borrow with the new stricter stress testing.
The new measures are designed to protect landlords and banks from high risk over-leveraging, and ensure that lenders do not over-expose themselves to the BTL sector.
It will result in lower loan to values typically around 60 to 65%, although higher yielding properties, likely to be located in the north of England, will be able to achieve higher LTV’s.
This may encourage landlords to invest where yields are higher, so that they will not have to put in such a large deposit, not to mention that northern properties tend to be significantly cheaper anyway.
When applying for BTL mortgage finance, portfolio landlords will need to provide a wider range of documentation and may be asked to provide:
> 12 month cash flow forecast Statement
> Statement of Assets and Liabilities
At Northwood, we can connect you with professional mortgage advisors to ensure you get the best advice on how to finance your property investments.
It is our aim to support our landlords throughout their property ownership lifecycle and ensure they survive and prosper, no matter what challenges arise! Professional advice is now becoming de rigeur for landlords, and is particularly important in the areas of finance and tax.
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