Changes set out by the Prudential Regulatory Authority (PRA) will come into effect on September 30th 2017. It is applicable to landlords with four or more properties and will have an effect on any new buy-to-let mortgages and refinancing of existing properties after the changes take effect.
Property finance is currently assessed on an individual basis. That’s for both the applicant and the property. The value of the property is assessed and then the finance approved based on the loan to value the lender is offering, such as a 75% LTV or less.
From September 30th, applicants with four or more, or buying their fourth property…lenders won’t be able to assess and approve buy-to-let mortgages on an individual basis. Part of the assessment will involve assessing your other finance arrangements across all lenders you hold buy-to-let mortgages with.
This is going to increase the length of time it takes to get a BTL mortgage approved, due to more time being required in the assessment process and longer after that for the underwriting of the finance terms.
As far as costing goes, it may be that BTL mortgage rates of portfolio landlords could increase by a percentage point or perhaps half a percentage point. That’d be dependent on how lenders change their terms. Some may opt to increase the interest rates, whereas others may have a higher booking/arrangement fee to account for the time spent assessing the application and then arranging the finance.
What will I need to be approved for A BTL mortgage after September 30th?
Landlords with four or more properties will have the liquidity of their business assessed during the application process. Lenders will be treating portfolio landlords just the same as they treat any self-employed mortgage application. You’ll be required to provide your end of year accounts, profits, losses, and verify your income.
It’s going to be tougher than a contractor mortgage though because each property in your portfolio is assessed as an individual asset. If you hold any properties on buy-to-let finance where it’s not raising enough capital to repay the interest on the mortgage, and instead, you’re relying on other profitable property rentals to cover the repayments, you may find getting new Buy to Let finance arrangements difficult. Each property in your portfolio should be consistently profitable.
That will be the toughest part of this change. The individual assessment of all your properties because it’s not unusual for one property to make less than others and then use the more profitable ventures to cover the shortfall.
There’s a variety of reasons income fluctuates for landlords. Some properties go through a spell of needing a lot of maintenance and repairs, or it could be a long-term tenant that’s just moved out leaving your property vacant.
The finances change on every property, every year. There is no fixed cost for maintenance, or any other expenditure. Sometimes it’s higher and sometimes you make a loss.
Just the one property making a loss could impact your chances of getting a new mortgage approved to increase your portfolio or refinance any existing property should it have increased in value.
The Financial Impact on Private Portfolio Landlords
The past few years have definitely made it tougher on private landlords. There’s far more restrictions and regulatory overview of the private residential lease market that’s making it next to impossible for some landlords to continue as business as usual. Some are opting to sell up and leave their rental properties.
However, that could also cost a lot more than expected and should be done with guidance from your accountant or financial advisor because having four or more properties sold off in the same financial year will be likely to trigger the higher capital gains tax rate of 28%. This could be avoided by staggering the sales of properties over multiple financial years so it will need an exit plan carefully drawn up and executed so you can exit in the most tax efficient way possible. If that is something you plan to do.
How many landlords are expected to be affected?
Very few landlords will actually be impeded by this latest change, but those who are, will be severely affected.
Data from 2010 showed that just 3% of private landlords had more than five properties. However, that small fraction of landlords accounted for 22% of the total properties in the private rental market.
For landlords with just the four properties, or slightly more, the changes aren’t likely to impact the lending process much. Perhaps the costs will increase by a percentage point or a half a percentage point because of the longer application process. Lenders are likely to increase prices to account for the time spent assessing buy-to-let mortgage applications and then more time in the underwriting process because there’s more properties to assess.
For larger portfolio landlords, such as those who have invested for years towards building their portfolio, there will be a major impact. The Telegraph wrote about one landlord’s situation where he’s built his portfolio of 37 properties over almost 30 years, and now reckons it could take just as long to sell it off.
Selling off a lot of properties in one financial year leaves portfolio landlords vulnerable to the higher rate of capital gains tax of 28% as mentioned above, which is why a staggered sales approach would be required by most to exit in the most tax efficient way possible.
The capital gains exception is just £11,300, which is far too low for any investor holding more than four properties. In addition, tax relief on mortgage interest on buy-to-let mortgages are being gradually phased out and will not be tax deductible by 2020. This additional cost will be assessed during the affordability assessment and stress testing on BTL mortgages from September 30th 2017.
Why are Landlords being targeted?
There are two main reasons the BTL mortgage market is seeing regulations strengthened by the PRA, which is part of the Bank of England. The Bank of England’s interest is to reduce risky lending/borrowing, so they’re making it tougher for Buy-to-Let investors. The other reason, as Reuters point out, the “Chancellor of the Exchequer George Osborne is squeezing more tax from buy-to-let (BTL) investments, partly to help fund incentives for new homeowners”.
What appears to be happening now is that in order to follow through on the commitment to affordable housing, landlords are seeing taxes increased, which will then be used to provide the funding to support mortgage applications for first time buyers and home movers.