Landlords and brokers are readying themselves for major changes to the underwriting rules for buy-to-let properties that could make borrowing more difficult.
With less than a week to go until the deadline for the Prudential Regulation Authority’s (PRA) underwriting guidelines for portfolio landlords – those with four or more properties – brokers are looking to get to grips with the different approaches taken by lenders.
Due to be rolled out on 30 September, the PRA-mandated changes mean lenders will have to evaluate the viability of all mortgages properties in a landlord’s portfolio when they apply for a new loan.
Despite the impending changes, a survey for lender Kent Reliance in August revealed just 54 per cent of brokers are comfortable that they fully understand what the upcoming PRA changes for portfolio landlords entail and what they will mean for their business.
But some have criticised lenders for leaving brokers without the information they need on their differing approaches to the changes.
Steve Olejnik, chief operating officer at Kent-based Mortgages for Business, commented: “It has been disappointing how slow the lending community has been in coming to announce what their new rules are going to be next week.
“Everyone has been fairly vague, but I do expect quite a few to give a bit more detail this week. Time will tell how chaotic it is going to be as lenders try to bed in new rules and how that slows down the application.”
Ying Tan, managing director at broker firm The Buy To Let Business, agreed the lending community has been slow, with some leaving it until the wire.
"To a degree many lenders are watching to see how others react before making their move which is why they have been slow in some instances.
"If this has meant that some have been lighter touch then this is not a problem. We have seen some detailed responses from lenders however I would urge lenders to continue to evolve as the deadline passes."
Advisers have already complained that they may need to raise the fees they charge for portfolio landlords due to the additional time required to collect the extra information, while others have complained they may end up turning business away.
As part of the changes in most cases intermediaries will need to obtain details of landlords’ cash flow, business model, mortgages and details of their other sources of income and expenditure – but the requirements can vary from lender to lender.
Leeds Building Society, for example, has said cash flow will only be requested in more complex cases, which are expected to account for a very small proportion of applications.
The interest cover ratio – the ratio of rental income needed to cover the mortgage plus other costs - remains the key to determining the affordability for every application.
It is set at a minimum of 125 per cent of interest payments and stress tested against a notional interest rate of at least 5.5 per cent.
Some major lenders, including the Co-op’s intermediary arm Platform, have pulled out of portfolio lending altogether.
Others, including Coventry, have specified a maximum loan-to-value and minimum interest coverage ratios that will apply across the whole portfolio.
Some, such as Barclays, have capped the number of properties allowed in a portfolio, while others, including Nationwide’s buy-to-let arm The Mortgage Works, will allow an unlimited number of properties.
In its original guidance, the PRA stated that: “Firms’ underwriting process for portfolio landlords should take a proportionate approach based on their knowledge of the borrower, their portfolio and alternative sources of income they have.”
Liz Syms, chief executive at London-based Connect for Intermediaries, said lenders' delays in giving brokers details of how they will now deal with applications from portfolio landlords were understandable given the PRA’s initial sparse guidance.
She said: “As brokers, we absolutely wanted to know sooner rather than later. I am putting the final touches to my own piece as to what additional fact-finding we have to gather to place cases with other lenders. Documents like business flow and cash plan are varying from lender to lender.
“We have a short time to do additional fact-finding to place with the right lender in the first place. That is the challenge for me over the next few weeks, so that regardless of the lender, we have got what we need. Had they been able to, we would have been happier to have them declare their hands sooner than now.”
simon.allin@ft.com
