How the new PRA buy to let rules will impact landlords with 4 or more properties
The Bank of England’s Prudential Regulatory Authority (PRA) introduced certain regulations that affect the way the buy to let mortgage market is governed. Subsequently, the PRA’s regulations have changed the way traditional lenders review applications that may make it tougher for landlords to secure buy to let property finance.
The new regulations have influenced what traditional lenders emphasise when considering a buy to let application; these regulations potentially affect landlords with four plus properties more than anyone else.
If you have four or more buy to let properties in your portfolio including student lets, houses of multiple occupation (HMO’s), professional lets, multiple units under one freehold title, company lets, short leasehold properties; you should familiarise yourself with how the new changes affect your prospects of securing property finance in the future.
2017 Regulation Changes
In 2016, the PRA carried out a thorough inspection of the buy to let mortgage market and the report that followed indicated that some traditional lenders had practised irresponsible lending. In an effort to stamp out irresponsible lending and to avoid another financial crisis akin to 2008, the PRA implemented the regulation changes that forced lenders to focus on rental coverage ratios, landlords’ income and property portfolios.
Rental coverage ratio: The new PRA regulations require lenders to only provide buy to let mortgage finance to landlords with a rental coverage ratio of at least 140% for standard buy to lets and up to 170% for houses in multiple occupation (HMOs). According to the PRA, the reason behind the hike in rental coverage ratio is to account for any period of time when a landlord’s property is without tenants.
To satisfy lenders’ high rental coverage ratio, landlords cannot simply increase the rental coverage ratio on their application; instead they will have to provide a formal valuation from a professional surveyor, which may increase the cost of borrowing even further.
Income stress test: Although lenders have always focused on landlords’ monthly income to assess affordability, lenders will now scrutinise landlords’ income more than ever. Lenders will implement a strict income stress test and landlords will have to prove that they can afford mortgage repayments in the event interest rates increase to 5.5%.
Review of entire portfolio: Lenders will now complete an in-depth review of a landlord’s property portfolio as a part of the application process. Due to the new regulations, lenders will no longer provide a buy to let mortgage to a landlord if one or more of their buy to let properties are not profitable.
This means that lenders can no longer spread equity over their portfolio to mask an unprofitable buy to let property. This recent change clearly affects landlords with four or more properties the most, as the more properties a landlord has the more work they will have to put in to ensure all of them are profitable.
Due to the new tax rules introduced in 2017, which ensured landlords can no longer deduct their entire expenses from their buy to let properties when calculating their profits at the end of the financial year, an increased number of landlords have set up their own limited company for their buy to let properties.
Unfortunately, the majority of high street lenders are reluctant to provide buy to let portfolio mortgages to limited companies.
If you are a landlord that set up a limited company for your buy to let properties then it is advisable to contact a professional broker for advice. A good broker will be able to find the right financial solution for your set of circumstances.
Bridging Finance to Counter the New Buy to Let Regulations
If you are a landlord with four or more properties and you need funding to purchase a new buy to let property or to refinance your portfolio, then bridging finance may be an option for you.
A bridging loan is a type of fast, short term loan that can be used to resolve cash flow issues and 'bridge' the gap in funding until more permanent finance is in place.
Bridging loans may be an attractive option for landlords with four or more buy to let properties, as they can provide a substantial amount of finance within a small time frame.
A bridging loan can provide:
- Finance from £50K to £25M
- Term of finance from 1 to 36 months
- Development finance within 7 days is possible
- FCA Regulated and unregulated loans
- Funding for individuals, limited companies, sole traders and partnerships and trusts
- Finance for unmortgageable properties
Traditional lenders’ criteria have made it much harder for landlords to secure finance, due to the intense emphasise on affordability. Bridging loan lenders have a more straightforward approach and simply require the landlord to have an exit plan. An exit plan is the method that a landlord intends to use to ensure that the loan is repaid within the agreed term of finance. An example of an exit plan for a landlord could be where they secure longer term finance, after bringing all of their buy to let properties up to traditional lenders’ standards. In this case, a broker would arrange a decision in principle to lend to ensure an exit is possible onto a buy to let mortgage.
Bridging loan lenders are usually flexible in relation to interest. The majority of bridging loan lenders offer the option to 'roll-up' interest to pay at the end of the term of finance. This means that landlords can direct their loan towards ensuring their portfolio is profitable, instead of wasting it on tedious monthly interest payments.
As a specialist property finance broker, Clifton Private Finance has a wealth of experience in finding buy to let mortgages for landlords with four or more properties; through strong links to private banks, specialist lenders and wealth managers, Clifton Private Finance can arrange the best financial solution for your set of circumstances.