Some Lenders Likely To Exit Making Loans to Portfolio Landlords
David Lawrenson says some commentators think there is a silver lining in the new rules on mortgage lending which the Bank of England’s Prudential Regulation Authority has now imposed on “portfolio landlords”. They say the new rules could actually make getting mortgages easier for this class of landlord. But Lawrenson says that conclusion is incorrect. There is no silver lining.
Lenders Likely To Exit Making Loans to Portfolio Landlords
New rules came in yesterday, (30th September 2017), that will affect people with four or more buy to let mortgages who are seeking mortgage finance.
I wrote about these rules in a little more length here at a recent blog:
In summary, under the new rules, if you want to make an application for a buy-to-let-mortgage on a new rental property, the lender will have to look at your entire property portfolio when they decide what mortgage deal they can offer on a single property. So, if you have six properties and four are generating enough rental income to cover mortgage payments but the other two are not, your new mortgage application may not be approved by some lenders.
Lenders will require for these “portfolio landlords”, a full breakdown of all rental properties, a business plan, and a cash flow projection to support a new application. As well as bank statements, applicants will have to provide their very latest HMRC return (which means landlords will need to complete their tax return immediately the tax year ends, because that is the one that the lenders will likely want to see! So no waiting till January 31st to submit a tax return. If you want a new mortgage you’d be well advised to submit to HMRC the previous April).
In previous blogs, I have said this new underwriting approach was unnecessary because there is no evidence that the portfolio landlords are more likely to default on their loans than any other type of mortgage borrower. The Bank of England has not published any justification or analyses to support this rule change, which all lenders are now going to have to follow from now on. (Note – the cynic in me thinks this change is all part of a wider tax /regulatory plan to hit buy to let landlords in order to open the market to institutional investors).
But some commentators have argued that maybe it is not such a bad thing. They point to the type of situation that we have all heard of wherein a landlord applies for a 75% loan to value mortgage to borrow say, £150,000 on a property valued at £200,000.
“Computer Says No”
The lender says “Computer Says No”, even in as situation where the landlord owns say, four other properties with piddly historic cheap tracker mortgage loans totalling say £60,000 outstanding, but valued at say £1million in total and producing a handsome net net income (after all running and finance costs) of £40,000 per annum.
Clearly, this landlord is in a great place financially – he has great cash flow and only a measly 6% loan to value on the rest of his portfolio – but many lenders would reject him because the LTV on the new property or the rent to interest ratio on it, is not sufficient for the lender. But clearly, this landlord is not a high risk because his whole portfolio is sound.
Some commentators say that under the new rules, he will now be able to get finance on the deal because the lender will now have to take a more intelligent approach and look at the whole portfolio.
Well, this is nonsense. The smarter mortgage lenders in the buy to let space – the likes of Paragon, Aldermore and Kent Reliance plus a few others – where necessary always adopted an intelligent “whole portfolio approach” to new loans which took into account a landlord’s entire portfolio for this kind of situation. Nothing has changed here at all. These lenders will simply carry on as they always did.
What will happen is that what I call the more “dabbling buy to let lenders” will find the new imposed underwriting process too much for them. They do not have the resources or type of set up to evaluate a landlord’s entire portfolio nor to do the underwriting checks that are now required by the regulatory authorities. As a result, we could see many of them exit the market for making mortgage loans to portfolio landlords. This could include the likes of BM Solutions (part of Lloyds Bank) and Barclays.
As a result, the lenders that remain in this space will have less competition and could well raise their margins and hence their mortgage rates or impose stricter criteria on portfolio landlords.
All in all, there is not a silver lining to this.
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