As soon as you own four or more mortgaged buy-to-let properties you’re a portfolio landlord. That means any buy-to-let mortgages you now apply for will be assessed using new specialised underwriting procedures. The latest date that lenders can implement these new procedures is 30 September 2017, and many have already made changes.
The changes are required under SS13/16, a supervisory statement issued by the Prudential Regulatory Authority in September 2016. The official title of SS13/16 is Underwriting standards for buy-to-let mortgage contracts.
With the exception of like for like remortgage applications, all existing buy-to-let mortgages will be considered along with the new application. Each property will be considered individually and as part of the overall portfolio. Properties and the portfolio must pass an income coverage ratio (ICR) test. This is the ratio of monthly rent to [stressed] monthly mortgage payment. The ICR used for the new application will be determined by the type of application, and will depend on personal tax band and whether applying as an individual or company. Individuals can expect ICRs of 135% to 155% whilst limited company applicants may be assessed using an ICR from 125%. The ICR used to assess existing properties and the overall portfolio may be different to the ICR used for the new application.
The ICR test must take into account potential future increases in interest rates. A stressed rate of pay rate+2% (subject to a minimum of 5.5%) has to be used to calculate the monthly mortgage payment. If the mortgage deal is for 5 years or more, then a lower stress rate can be used, though in many cases lenders are still setting this higher than the pay rate.
Lenders will have to take an overview of the applicant as a whole and not just their buy-to-let properties. The history of the portfolio and projections for the future will be considered. This will be achieved by requesting prior accounts, a cash flow forecast and a business plan. Portfolio landlords should be prepared for having to provide more information than they may previously be used to, for example proof of income, personal bank statements, mortgage statements and rental agreements.
Maxwell Moore can help you with cash flow and business plan templates as part of our service for buy-to-let clients. If you are looking for a buy-to-let mortgage then get in touch with us on 0330 122 7887 or via our website at https://maxwellmoore.co.uk.