Buy-to-let landlords face new lending probe (Birmingham Post Article)

Scrutiny of buy-to-let businesses and their borrowings is about to get a whole lot tougher.
From September 30 lenders must grapple with changes to the way in which applications are underwritten for portfolio landlords – defined as those with four or more mortgaged properties.
The new regime is being driven by the Prudential Regulation Authority (PRA) and follows a review of the market place in 2015/2016.
This instructed lenders, when assessing the affordability of a buy-to-let mortgage contract, to test whether the income derived from the property would be sufficient to support the monthly interest cost of the mortgage payments and, where some of this is supported by personal income, whether the two together meet requirements.
Lenders were also told to consider the effect of likely future interest rate increases on affordability.
Partly introduced in January of this year, the final wave of these changes is now being implemented.
It means that lenders will operate a specialist underwriting approach, taking into account the landlord’s experience within the sector, the performance and location of their established portfolio, their assets and liabilities, current and future cashflow, and any consequences in respect to existing properties and their financial returns.
The regulatory shake-up is because the PRA has found that arrears rates increase as portfolio size rises.
So, what does all this mean for portfolio landlords?
The purpose of the changes is to ensure lenders continue to lend responsibly in an ever-changing market place. However, remortgaging/refinancing is likely to be more difficult due to the new magnified application process.
Landlords, who would currently be acceptable for further finance, may find their future applications declined if after a review of their portfolio and circumstances they are deemed unsuitable. This could have a devastating effect on those who require cash for essential property improvements or for growing their holdings.
And the availability of money for landlords doesn’t just stop there, with many mainstream lenders seemingly reluctant to play in the portfolio buy-to-let market due to the increased resource it will now require. As a result, it is likely that you will see reduced numbers comprising mostly specialists such as Paragon Mortgages and Precise Mortgages.
Further, gear up for longer processing times due to the extra work involved for each application. The PRA suggests that cash flow forecasts, business plans and portfolio spreadsheets should all be reviewed, so applications are likely to look similar to those for business loans, as opposed to regular mortgages.
With the more complex underwriting involved, beware a frustrating and lengthy teething period until the new look application process has bedded in.
Given finance availability potentially reduced, market competition dampened, and application times increased, there is a serious risk that these changes will push up the price of borrowing. As we have already started to see with the affordability monitoring, these changes ultimately have a knock-on effect, squeezing rental prices higher.
What can buy-to-let portfolio landlords do in preparation?
Consider arranging any portfolio property finance plans before the September 30 deadline – for ease, potential cheaper cost of lending and to reduce the risk of finance not being available due to the new rules.
Portfolio landlords on variable products, without early repayment charges, or those looking to obtain further finance, should speak to a mortgage broker and review their circumstances ahead of the cut-off.
For those unable to review, ensure you are fully prepared.
Accommodate the changes moving forward, ensuring your portfolio documentation is in order and up to date.
Allow for increased processing times – from October start any application well in advance of when you require the funds, so as not to be disappointed.