Portfolio landlords are feeling the pinch

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.

Portfolio landlords who own four or more properties have likely been hit the hardest

“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.”

Tighter restrictions

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.”

Mr Clifford shares this view, adding: “The underlying driver in terms of risk assessment is the PRA are looking to avoid having landlords that have limited income, are highly leveraged and are overly reliant on the portfolio income.

Meanwhile, Mark Homer, co-founder of Progressive Property, says the PRA’s rules merely formalised what was already in practice among major lenders.

He says: “Most lenders were following this process since the credit crunch anyway. All of the lenders I have used asked for this information prior to the new rules being enforced as they wanted to make sure they weren’t making loans to people with negative cashflow and other issues in their portfolio.”

Increased workload

There is little doubt the new regulations have made things more difficult for brokers. Not only is the workload higher, but some lenders have pulled back from the market entirely.

Mr Clifford says the underwriting process demands significantly more paperwork and effort than for those with only one or two properties. However, he adds that many lenders in this market will have dedicated teams for portfolio underwriting, which can be helpful.

He says: “It’s just more time consuming, and we’re providing lenders with far more information. There is usually quite a high bar in terms of additional documentation and information needed on background properties.

“Some lenders are still not doing or are no longer doing portfolio lending at all, so there’s been some reduction in choice of overall lenders but there is still consumer choice.

Meanwhile, Steve Matthews, head of buy-to-let sales at Octopus Property, says the industry has adapted well to the new regulations, and that lenders and brokers need to find ways to work better together to overcome the hurdles that the new rules have created.

He says: “Brokers are doing a fantastic job at adapting to underwriting requirements for landlords, but are equally recognising that arranging finance for lenders can be a very time-consuming job.  

“Brokers need to understand that paperwork and additional questioning is time-consuming for both parties and that lenders are adapting to regulatory requirements; equally lenders need to understand that brokers are not generally resource-heavy business and need to invest in processes and tech that assist the broker in submitting business in a way that can help both parties.

Geordie Clarke is a freelance journalist