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BTL borrowers burdened by PRA rule change

A growing number of buy-to-let are struggling to obtain mortgages following the introduction of tougher lending conditions, including more rigid underwriting criteria for lenders introduced by the Prudential Regulation Authority (PRA).

Six months on from the Bank of England’s (BoE) latest attempt to cool the buy-to-let market, 63% of landlords surveyed by the National Landlords Association’s (NLA) say it is now harder to get a mortgage. This increases to 70% for portfolio landlords, i.e. those with four or more buy-to-let mortgages.

Similarly, almost half - 48% - of landlords aware of the changes believe it has slowed down the finance process and 46% believe the changes reduce the range of mortgage products available.

The changes, which come from BoE’s Prudential Regulatory Authority (PRA), were introduced in two phases last year.

Phase one involved the need for lenders to check that the rental income is sufficiently higher than the monthly mortgage cost with an interest cover ratio (ICR) of 5.5% now needed, while additional costs - such as management charges and lettings agency fees - now have to be taken into account when calculating the income coverage, with monthly rental income typically needing to cover 125% of mortgage repayments.

Phase two, introduced in September 2017, requires portfolio landlords, i.e. those with four or more buy-to-let mortgages, to undergo specialist underwriting processes when seeking new buy-to-let mortgages. This includes additional affordability tests with providing supporting documentation such as business plans. It also means that underwriters must look at the landlord’s entire portfolio when considering new applications, not just the property needing to be financed.

Richard Lambert, CEO of the NLA, commented: “These findings show that the PRA’s changes seem to be greatly affecting the ability of landlords to find new finance and increase their portfolios.

“Given that the private rented sector now makes up 20% of the housing market, it is vital that professional landlords are incentivised to continue providing good quality affordable housing to those who need it. This appears to be achieving quite the reverse.”

“Landlords looking to add new properties to their portfolios need to be conscious of the new requirements. We suggest talking to your mortgage broker or bank before committing to any new property.”

  • Peter David

    Why is there all this aggro for landlords and the buy to let business? Where's the value? I remain confused. Surely there are more important areas to spend mental energy than persecuting an important and largely very well run business sector.

  • Verity Bird

    I'm completely baffled as to what these new regulations are supposed to be achieving. Each property needs to stand on its own two feet (so to speak), and with the criteria for the individual loans, with mortgages covered to 125% of the commitment at nearly double the interest rate that someone on top of their portfolio would be paying, there surely has to be sufficient 'float' in an investor's portfolio to cover periodic voids/refurbishments etc.

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