Updated for 2018
New buy-to-let mortgage rules were introduced in September 2017, which make it tougher for landlords with four or more mortgaged properties to borrow money. Here’s everything you need to know about the new buy-to-let mortgage rules.
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Why are there new buy-to-let mortgage rules?
The new rules are designed to reduce irresponsible lending and make buy-to-let mortgage and lending requirements tighter. They were introduced by the Bank of England (specifically the Prudential Regulation Authority), and also include the interest rates-dependent ‘stress test’ on new mortgage applications.
Lenders need to review a landlord’s entire property portfolio when making a decision on their single property application, which will potentially hit hard on multi-property landlords, especially if one or two of your properties aren’t turning as much of a profit.
These are the buy-to-let mortgage criteria
Under the rules introduced in September 2017 by the Prudential Regulation Authority, landlords with four or more properties are classed as portfolio investors. If you have four or more mortgaged properties (or are planning on adding more to your portfolio), these buy-to-let mortgage rules apply.
The buy-to-let lending criteria mean lenders are required to look at your whole property portfolio when you’re making a mortgage application for a single property. They will look at total income against borrowing across all of your properties, to make sure that new borrowing won’t affect your affordability for the other properties.
In some cases, lenders may take into account your individual earned income or salary.
The new criteria mean that you’re probably going to need to provide your lender with much more detailed information. What you need to provide will vary from lender to lender. But this information is likely to include, for each property that you own:
- Current mortgage borrowing
- Rental income
- Related outgoings
- Rental profits
- Tax and business returns
You may need to include details of other financial assets you hold and your personal income, and lenders may ask for a business plan. Lenders may have templates they can provide you, which lets you enter the information how they want it.
As the buy-to-let mortgage application process will likely take longer, if you want to add to your portfolio, planning ahead will be vital. The Mortgage Advice Bureau suggests making sure you leave at least three months for lenders to make all the checks they need.
The new stress test on buy-to-let mortgages
2017 also saw new rules regarding stress tests on buy-to-let mortgages, causing further issues for landlords who’re looking to expand or find new mortgages.
Monthly rental income will typically need to cover 125% of mortgage repayments. The stress test also forces lenders to check a borrower can afford repayments if interest rates were to hit 5.5%. Lenders may ask to see a business plan, too.
What should landlords do?
These new strips of red tape mean that some lenders have decided to stop offering buy-to-let mortgages to portfolio investors altogether. This puts UK landlords in a potentially difficult situation, and it will certainly make applications more time consuming.
You may not be able to stay with your current lender when you refinance. If you are a portfolio investor, it’s best to speak to your lender to find out where you stand. You should ask them about your current deals, whether you can refinance, and what help they would offer if you do need to secure deals elsewhere.
And if you haven’t conducted a portfolio review in some time, these new rules mean it could be a good time to do so. You should work with your advisers to find out whether you would need to make any changes to your portfolio if you wanted to secure mortgage deals in the future. You can also work with them on gathering any documents you might need to provide lenders.
Will you be affected by the buy-to-let mortgage criteria in 2018? Let us know in the comments below.