Andy considers how the more commercial lenders are interpreting the new PRA guidelines when underwriting buy to let mortgage applications from businesses that fall into the portfolio landlord category.
As you may have already heard, this week the buy to let mortgage sector entered a new era. One in which landlords with four or more mortgaged buy to let properties, are treated differently by lenders when underwriting new mortgage applications. The change made me wonder how the more commercial lenders are interpreting the new PRA guidelines, and by that, I mean the High Street banks and building societies that lend to businesses.
For example, how are these lenders treating limited company borrowers who are classified as portfolio landlords and who have a mixture of mortgaged commercial, semi-commercial and buy to let properties within their portfolios?
The commercial lenders tell me that as they are already specialist corporate and commercial lenders, they won’t be changing their stance or their underwriting criteria because it already complies with the new PRA guidelines. Good news, you all murmur.
And I would agree. Since the credit crunch in 2008, these lenders have always investigated the background to every application, investigated gearing, loan to values, rental cover and applied stress testing to the entire portfolio. If they weren’t happy with any of the out-puts they wouldn’t lend.
Before the new rules came in, these lenders were often accused of being picky, but now of course, their longstanding approach will soon be seen as common practice among all buy to let lenders offering mortgages to portfolio landlords.
In light of the new rules, the commercial lenders tell me that they are not asking for any additional information to be provided by the client, over and above what they already collate, although some have amended their application forms slightly to show an appropriate audit trail of up to five properties in a portfolio, just to demonstrate, if asked by the regulator, that background checks are being made.
If you’ve not been down this borrowing route before, when assessing these applications, for both new finance and remortgages, the commercial lender will also:
Do a Land Registry search to check that the details of properties listed are correct, i.e. they will check the purchase date and price, and the property type. Any discrepancies can then be investigated. For example, a freehold house might have been converted into flats or an HMO. (Increasingly, both the commercial and the mainstream buy to let lenders are using Automated Valuation Models to assist with this process).
Look at your aggregated borrowing. Not only will they want to know about all the properties you own, they will want to know how you own them, both personally and in a corporate structure (i.e. in a limited company). Added to this they will want to know what debt you have secured against these properties and any other debts you have too (both secured and unsecured), again from both a personal and corporate perspective.
Often, when assessing applications, the commercial lenders will meet with the applicants and by gosh, this can save borrowers time and effort in compiling data! The bank manager will then take your application and all the information gathered from you and put it into a report that goes before the credit committee who make the lending decision. This face-to-face and typically bespoke approach is not one that happens in the less commercial, more mainstream buy to let lending arena where mortgages are commoditised into specific products, and borrowing is determined via check boxes.
Because the commercial lenders have had their processes and systems have been in place for a long time, I doubt the PRA changes will have much impact, although we might see some increase in turnaround times if they find themselves inundated with applications. Just a few days in, it’s too early to tell but I will keep you in the loop…
In my view, the changes within the market may mean that in future, some serious investors may look towards just one or two commercial lenders for all their property financing needs. Yes, pricing might be marginally higher – after all, these lenders lend straight off the balance sheet - but this will be offset by the service they receive from a lender that knows them well and can make a decision outside of the confines of a check box.
At Mortgages for Business we have a commercial team of five expert brokers. I often harp on about ‘experience in sector’ and collectively, we have 125+ years of this. Yes, we are a little slower than the youth of today, but we get things right first time in the majority of cases.
Our team includes three former business banking commercial relationship directors that write super bank lending proposals. And we can teach the lenders a thing or two about why they should commit facilities to you…
As ever, if you would like to talk through the finance options for you, I can be contacted directly on 01732 471644 or andye@mortgagesforbusiness, or call the main line on 0345 345 6788.