Buy To Let Underwriting – Changing the rules of the game. What are the strategic considerations?
Why the changes?
- Over 2015-16, the Prudential Regulation Authority (PRA) undertook an underwriting standards review of 31 BTL lenders constituting 92% of hte .
- Concerns were raised around the relaxation of underwriting standards to fuel lender growth may result in borrowers more vulnerable to negative economic changes.
- Following a consultation process, PRA changes were proposed to ensure that lenders adopt a more “prudent” line in lending, “prevent a marked loosening in buy-to-let underwriting standards”, and “curtail inappropriate lending and the potential for excessive credit losses”.
What does this mean?
- Tighter assessments on the affordability of BTL mortgage applications to impose a greater buffer for the investor if interest rates were to rise, or during void periods, so that repayments would not become unaffordable.
- Broadly, the stress test is increasing to 5.5% (from 5%) and Interest Coverage Ratio (ICR) is increasing to 145% (from 125%) plus a number of additional requirements as part of applications.
When are these changes happening?
By 1st Jan 2017, all lenders affected should have implemented the required interest coverage ratios to include the impact of personal tax changes and interest rate affordability stress tests.
What are the exemptions?
- Bridging loans, holiday lets, property investment lending, corporate lending BUT these deals will be monitored by the PRA to ensure a prudent approach to underwriting.
- Consent-to-let deals, BTL with rems less than 12 months, BTL mortgages where the existing borrower does not wish to make additional borrowing beyond the existing outstanding debt (excluding fees & administration costs for arranging the new mortgage product).
- 5-year products – where lenders are offering a 5 year rate (or more) fixed rate product, no need to increase the affordability stress test.
Do you have 4+ mortgaged BTL properties?
- PRA research highlighted that arrears rates increased as portfolio sizes increased. The overarching aim is to reduce arrears, thus the PRA has asked lenders to take a specialist approach when underwriting deals for portfolio landlords.
- You will be most likely need to go through a more specialist underwriting process that will require greater personal information than has been previously requested.
- Your experience of the BTL and your understanding of buy-to-let finance
- Your assets and liabilities (including tax)
- The merits of lending on new properties based on your portfolio and business plan
- The historical and future expected cash flows related to your portfolio
What is the overall net impact?
- By 1st Jan 2017, upper borrowing limits are likely to be reduced with a significant proportion of BTL lenders, especially for those looking to raise capital.
Financial example for a specific property:
- Max debt has reduced by £56.7k ; max LTV has reduced from 75% to 59%
- To maintain same LTV level as before the proposed changes, the rent has to be 28% higher
On a portfolio basis, if you own 4+ properties, we would expect the same adjustments to apply when calculating figures like shown above on an aggregated basis – BUT also taking into account the exemptions noted earlier.
London Property Analyst is not a qualified tax advisor and the above does not purport to be and should not be relied upon as tax advice.