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.”