The new Prudential Regulation Authority (PRA) guidelines for portfolio landlords came into operation on 30 September. Here we look at how they will affect landlords.
Firstly, it is important to define a ‘portfolio landlord’.
The Prudential Regulation Authority has defined portfolio landlords as ‘borrowers with four or more distinct mortgaged buy to let properties, either together or separately, in aggregate’.
All landlords deemed to qualify on these criteria will face stricter affordability tests including Interest Cover Ratio including the impact of recent Tax Changes and a stress test on interest rate rises.
Most lenders have now announced their own personal lending criteria going forward to cover the new PRA requirements.
The more experienced commercial lenders have not needed to make many changes, as their business models have covered the new criteria already. However, many mainstream lenders are installing different criteria for portfolio and non-portfolio landlords.
If you own three or less buy to let rental properties, there is likely to be no changes, in fact the process may even be made easier and more streamlined.
For those landlords who own four or more rental properties however, things could become a little more complicated and time consuming.
Lenders will be required to carry out an affordability test, covering all costs associated with renting a property, tax liability, income net of tax, national insurance payments, credit commitments, committed expenditure, essential expenditure and living costs. If you are relying on personal income to support the rent, then this will hold more weight in the affordability test.
Lenders may vary slightly in their criteria, but the following is likely to be required for all portfolio landlord lending:
• Portfolio schedules will be reviewed, probably with the help of automated valuation systems
• All outstanding mortgages will need to be found on credit searches or annual lender statements provided
• Rentals and monthly payments will be checked against bank statements
• Evidence of rental income – and all other sources of income for that matter – will need to be reflected on tax returns
• Business plans and cash flow forecasts will have to be produced.
The PRA does not prescribe exact requirements, but outlines lenders should take into consideration a landlord’s experience and record their full portfolio, rent and outstanding mortgages. In addition to assets, liabilities and tax liabilities.
The PRA also expects lenders to take into consideration the merits of any new lending in accordance with the landlord’s business plan. In addition to historical and future expected cash flows.
In summary, landlords with three or less mortgaged rental properties should have nothing to worry about, and could even find their buy to let lending requirements easier, with a more streamlined process.
Portfolio landlords with four or more mortgaged rental properties may find finance a little more complicated to access, but no more complicated than applying for a traditional business loan, which has always asked for similar criteria.
When building a landlord property portfolio, you are indeed building a business, so the details required now for borrowing – business plan, forecasts, and the like – will also be very useful in ensuring that your portfolio landlord business can go from strength to strength.