Buy-to-Let Properties: The New ‘Affordability Rules’
If you are a buy-to-let landlord, and you thought the 3% Stamp Duty Surcharge had impacted your ability to purchase further properties, have you considered how the new ‘Affordability Rules’ will affect you?
On 30 September 2017 new rules came into force for all landlords owning four or more properties with the aim of putting a stop to high risk buy-to-let lending.
As a result, the Bank of England’s Prudential Regulation Authority (PRA) has implemented stricter tests to check the affordability of portfolio landlords; which has led to a number of smaller lenders dropping out of the buy-to-let market entirely.
The new rules mean that lenders need to check every single property within a landlord’s portfolio in order to assess total income versus borrowing.
This enables lenders to ensure that the new property will not adversely affect the affordability of other properties within the landlord’s portfolio, and assess if they will be able to keep up to date with their mortgage repayments for that property (based upon the rental income they receive from the other properties they own).
In the past, it was sufficient for landlords to provide lenders with their portfolio accounts, grouping the properties together. However, lenders now ask to see cash flow projections and business models for each and every property.
Although this analysis can vary between lenders, it includes factors such as:
- Cash flow across the portfolio
- The borrower’s experience in the buy-to-let market
- Any assets, liabilities, or alternative sources of income
- The location of the properties
These changes not only apply when purchasing another buy-to-let property but also when refinancing a property, and the landlord will be required to show that the monthly rental income is sufficient to cover at least 125% of the mortgage payments repayable at an interest rate of 5.5%.
The banks have applied this interest rate “stress test” to account for future changes in the market.
So, how is this likely to impact you?
It is becoming increasingly difficult to obtain a buy-to-let mortgage, and it is likely that interest rates will rise due to reduced competition between lenders.
Lenders may also start to charge higher administration fees due to the increased paperwork and due diligence required to be carried out.
In order to find the best mortgage, and to be guided through the various requirements being imposed we recommend that you instruct an independent mortgage adviser, and a legal adviser to deal with any purchase or refinance work.