As of 30 September 2017, the buy-to-let mortgage market has become even more complex.
As well as the landlord tax changes that came into effect in April 2017, there is new additional mortgage borrowing criteria that will affect portfolio landlords – mainly that, when applying for a new mortgage or remortgage product, your whole property portfolio will be assessed to determine your borrowing ability.
Here, we’ve outlined the new mortgage criteria for buy-to-let landlords, what has changed and how this may affect you if you own four or more buy-to-let properties.
Lenders will assess the applicant’s entire portfolio
A portfolio landlord is defined as one who owns four or more mortgaged buy-to-let properties, or one with three properties who is buying a fourth.
The main impact of the change is that when a portfolio landlord submits an application for a new buy-to-let mortgage, or a re-mortgage application for an existing property, the mortgage lender will make their lending decision by applying their rental stress test (Interest Coverage Ratios) to every property in the portfolio – irrespective of whether they are lending against one, or all of the properties.
We can help you with the paperwork - keeping everything for you landlord application organised on your My Foxtons account.
Stress testing
An Interest Coverage Ratio is a stress test that determines whether the rental income on a property is sufficient to cover a landlord's mortgage repayments if interest rates were to increase.
All buy-to-let mortgage applications will involve a stress test on the property in question, to satisfy the mortgage lender that payments can be maintained in a higher interest rate climate. Currently the industry standard is a rate of 5.5% and the rental value must be 145% of that monthly figure.
What does this mean for current portfolio landlords?
Before September 30, a mortgage lender would look at the potential rental income and value of an individual property to determine what the borrowing level could be for that particular dwelling.
But now, if you have a property in your portfolio that does not perform when applying the stress test, this will have an impact on the success of your new mortgage application. So if you have just one underperforming property in your portfolio, your overall borrowing ability could be affected.
Additional evidence to support your application
As there will be more rigorous lending criteria in place, landlords will have to submit additional documentation when applying for the mortgage, including:
- Full tax returns
- Cash flow forecasts
- Tenancy agreements and bank statements for each rental property
- A portfolio summary demonstrating property values, mortgage loan size and payments, as well as rental values
- A landlord’s ‘business plan’ outlining future strategy for purchasing and investment
It is important to note that these new mortgage criteria will apply to landlords who own their property in their own name and also those who are operating through a limited company.
If you think you’re affected by these changes and want to speak someone about your options, contact Alexander Hall today.
