Few can deny the buy-to-let sector has taken a beating recently, particularly as a result of the cut to mortgage interest tax relief.
Challenging as that may be, so-called portfolio landlords who own four or more properties have likely been hit the hardest.
Since September 2017, these investors have been subject to stricter mortgage underwriting rules that require lenders to conduct a full analysis of their property portfolios before approving a loan.
When the Prudential Regulation Authority first rolled out the new rules, it was feared they would result in reduced choice from lenders and force landlords to sell up.
More than 18 months later and this appears partially true: the number of rental properties in England fell by 46,000 in 2017, while UK Finance figures show the number of buy-to-let mortgages completed in February this year was 7.7 per cent lower than the same month last year.
In spite of this, Rob Clifford, chief executive of SDL Mortgage Services, says the new underwriting requirements can not be blamed for the current market dynamics.
“The market is not greatly suffering, but it’s reduced in size,” he says. “That’s not because of regulatory intervention and stricter lending criteria; it’s in fact the change to tax legislation.”
In fact, many observers believe the stricter regulations have raised standards in the market and nudged landlords towards operating more like formal businesses. This is a view expressed by John Goodall, chief executive of Landbay, who says the market is professionalising in response to the tougher rules.
He says: “Increasingly people are buying property through limited companies and the growth is for professional landlords that are focused on yield and running it as a business.”
No matter how you view it, the new regulations – which apply only to the lenders it regulates – make the underwriting process more complex.
In addition to the standard affordability tests for buy-to-let investors, they must undergo a specialist underwriting process that analyses all of a landlord’s properties – not just those that are mortgaged – to ensure the portfolio has enough rental income cover and can withstand rising interest rates.
This includes stress-testing the entire portfolio at an interest rate of 5.5 per cent over the first five years and requiring that the rental income covers 125 per cent of the debt for limited companies or 145 per cent for individual applicants.
As part of the process, landlords need to submit additional paperwork relating to their properties, including a property portfolio schedule, business plan, assets and liabilities statement, and a cash flow statement.
Gavin Seaholme, head of sales at Shawbrook Commercial Mortgages, says: “The regulator aims to mitigate the elevated risks from these landlords resulting from the higher aggregate debt levels, more complex cash flows and cost structures, and geographical concentration of the properties.”