As of 1st October 2017 lenders will need to implement a more thorough underwriting process when considering mortgage applications from portfolio landlords, i.e. where the borrower has, or will have more than four mortgaged residential buy to let properties.
We have known about this for some time now, but have been waiting for lenders to come forward and tell us how this is going to work when approaching them for finance for our clients. I was fortunate enough to be invited to Aldermore this week, and was presented how they will be working with portfolio landlords going forwards.
Before I launch into this, it’s worth throwing in a caveat…
The PRA has issued the requirement for additional underwriting for portfolio landlords. The lenders are then left to decide how they will implement the guidelines. So as you would imagine, lenders are, to some extent, left to interpret what they need to do. Therefore, the Aldermore approach will not be the only approach. However, it gives us a very good insight into the future.
Portfolio landlord definition
From Aldermore’s definition of a portfolio landlord is an applicant (either an individual or corporate body) who has four or more mortgaged buy to let properties across all lenders. This includes property which is held in a limited company, where a borrower owns a 25% or more share. Properties excluded from the ‘four’ are holiday lets, commercial and mixed use property, second homes and the borrower’s own home.
More supporting documentation
In addition to the usual documents which support a mortgage application, Aldermore will require full details of the borrower’s property portfolio and a business plan. Having seen Aldermore’s draft template for each of these, it’s fair to say they are looking to make this straightforward as possible.
The business plan asks straight forward questions relating to the borrower’s plans for the proposed security and their portfolio as a whole for the next 12 months. However, it's also worth noting that Aldermore will be curious about the answers borrowers provide, so the documents should be completed with consideration rather than arbitrarily.
Going forwards, these types of documents are likely to be standard for most lenders.
Cash flow forecasts
We expect some lenders will also ask for a cash flow forecast and/or a statement of assets and liabilities. Aldermore will ask for cash flow forecasts and statement of assets and liabilities if the borrower has mortgages with Aldermore on 11 or more buy-to-let properties.
Entire portfolio review
A bigger variable will be how lenders look at the background properties, i.e. rental properties mortgaged with other lenders. Essentially the lenders have been tasked with considering the affordability of the wider portfolio.
Rent to interest calculations
Aldermore will calculate a weighted interest cover ratio for the portfolio as a whole based on the individual constituent parts of the portfolio (single units in individual name(s) at 145%; single units in limited company name at 125%; HMOs in individual name(s) at 185% and HMOs in limited company name at 155%) and apply a stress rate of 5.5%. As it reviews the properties in aggregate it means that if one property doesn't quite work but another has enough surplus to cover it then that's fine. But if across the board, the numbers aren't working out then I am afraid that they simply will not lend.
However, it is fair to say that life is going to get more complicated and so, if you do want to remortgage, particularly if you are a portfolio landlord, now is a very, very good time to do it.
If you need any assistance call the main broker hotline on 0345 345 6788.
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