The PRA defines portfolio landlords as: “borrowers with four or more distinct mortgaged buy-to-let properties, either together or separately, in aggregate.”
If you do have 4 or more mortgaged buy-to-let properties, you will find a more paperwork intensive process. The lender may request a business plan, a portfolio spreadsheet, background portfolio stress testing, assets & liability or cash flow forecast.
At Cyborg Finance we help portfolio landlords through the paperwork. We know which mortgage lenders are in favour or not of portfolio landlords.
Am I a portfolio landlord?
Landlords with 4 (or more) buy-to-let properties from September 2017 are required to meet new mortgage lending requirements.
These are in addition to the Interest coverage ratio (ICR), Interest rate affordability and Income affordability test that came in January 2017.
The Prudential Regulatory Authority (PRA) suggests that data shows "that arrears rates increase as portfolio size increases".
The PRA goes on to suggest "minimum underwriting standards ... broadly reflect existing practice for most lenders in the market today."
Our view: it's not"existing practice" it's a lot of additional paperwork, higher standards and slower process.
Will this apply to me?
Landlords with four or more distinct mortgaged buy-to-let properties, either individually or together, in aggregate, will be treated as ‘portfolio landlords'.
Properties in Limited Companies owned by the Landlord will be included in the count.
Will I be exempt?
Exceptions include holiday lets, bridging loans and corporate lending.
High Net Worth (HNW) are not exempt but lenders can take wealth into account to support background portfolio affordability tests.
The calculation of 4 properties does not include unencumbered buy-to-let properties. It's unknown if mortgage lenders will apply this distinction.
What is required?
The PRA suggests Buy-to-Let Lender's request:
- Property Portfolio Spreadsheet.
- Cash Flow Forecast Spreadsheet.
- Income and Expenditure Spreadsheet
- Business Plan
- Bank Statements (3 Months)
- SA302's and Tax Overview's from HMRC
- Tenancy Agreements
Mortgage lenders will apply new portfolio tests as they seem feasible to meet new PRA guidelines. They may differ in approach once announced:
Property Portfolio Spreadsheet, Why?
Lenders are not looking for just a list of properties.
They want to test the overall viability of the portfolio including checking:
- Portfolio Loan to Value.
- Rental Affordability Stress Test
- Property Locations
- Rents Achievable
- Landlord Experience (ownership duration)
Many of the reasons may be self-explanatory - checking LTV to ensure no properties are in negative equity. Though others such as the location of current properties in comparison to the new purchase and if it passes viability tests.
Cash Flow Forecast, Why?
The forecast estimates what the cash into the bank account and cash out of the bank account will be over the next 12 months.
The cash flow forecast is to test the financial viability of extending your portfolio.
They want to ensure positive cash flow or if there is a dip that excess funds exist to cover it.
Income and Expenditure, Why?
The Income and Expenditure document is outlining your current budget. It is an overview of all your income streams (wage/rents/etc.) as well as any expenditure such as day-to-day costs and credit agreements.
Income and Expenditure are to test your current financial viability and identify any risks in your current budget.
It's an affordability test - if you break even or expenditure is higher than income then the case may be declined.
Business Plan, Why?
Your business plan is a formal statement of your goals, reasons they are attainable and plans to reach them.
A business plan can help you inform the mortgage underwriter of your competency (how long you have been a landlord), experience, current approach, future plans and how expanding your portfolio will assist with your goals.
For example - To explain the business logic of investing in Scotland despite living in London is a good business decision, how properties are to be managed and how you have experience in the differences in UK and Scotland Tenancy legislation.
Why do they want my Bank Statements & SA302?
These are required to verify the information you have provided. You have not omitted any income or expenditure which may change the outcome of the income and expenditure decelerations made earlier.
The documents assist as proof of identity, evidence of residence, proof of income, proof of expenditure, money laundering checks and so forth.
Why do they want my Tenancy Agreements?
These are required to verify the income you have declared on your portfolio spreadsheet that the rents are accurate. Lenders may also be able to check tenants residence at the properties using credit data - to help prevent fraud.
How will bank's implement the PRA Rules?
The article so far has been regarding PRA guidance after insisting that lenders look at portfolio landlords differently. How each bank will apply the guidance is set out below.
How The Mortgage Works will apply the changes?
A portfolio landlord is a borrower with four or more distinct mortgaged Buy to Let rental properties. (not including foreign properties).
As a minimum - the new tests will apply if the landlord is buying the 4th property.
TMW will continue to accept portfolios of all sizes, with no limit to the number of properties accepted.
All portfolio landlord applications will be subject to an affordability assessment (including properties not mortgaged with TMW) to validate the level of BTL borrowing and rental cover.
Currently, all basic rate taxpayers are tested at an Interest Cover Ratio (ICR) of 125%.
With these changes, All portfolio landlords (regardless of tax bracket) will have a higher Interest Cover Ratio (ICR) of 145%, the same as Higher Rate Taxpayers.
Extra Documents TMW will require
- Portfolio Spreadsheet
- Business Plan (on complex/large portfolio cases)
- Proof of Income as 3 Months Bank Statements
- Asset and Liability Statement (on complex/large portfolio cases)
How Aldermore will apply the changes?
A portfolio landlord is a borrower with interest in 4 or more mortgaged Buy-to-Let properties. A mortgage must be counted in this number if the Buy-to-Let property is owned solely or jointly by the applicant, or by a company in which the applicant has at least a 25% share.
If a landlord has 4 separate properties on more mortgage they will still be classified as a portfolio landlord with Aldermore. (Example 4 flats on one title).
All portfolio landlord applications will be subject to an affordability assessment (including properties not mortgaged with Aldermore).
Personal income and expenditure will be assessed - including tax liability, living costs, essential expenditure, ongoing credit commitments and other financial commitments.
Aldermore has two routes for portfolio landlords. A standard Assessment or an Enhanced Assessment. If you have 11 or more mortgaged BTL properties with Aldermore, they will use the "enhanced assessment".
Extra Documents Aldermore will require:
- Portfolio Spreadsheet
- Business Plan
- Cashflow Forecast (enhanced assessment route only)
- Asset and Liability Statement (enhanced assessment route only)
- Face to Face Interview (enhanced assessment route only)
(Source: Intermediary Only.)
How Mortgage Trust will apply the changes?
After 17 July, the only applications that should be submitted to Mortgage Trust are from individual non-portfolio landlords.
Portfolio Landlords, Limited Companies, Houses of Multiple Occupation (HMO) and Multi-Unit Block (MUB) should be submitted to Paragon.
How Paragon will apply the changes?
A portfolio landlord is a landlord with more than three mortgaged buy-to-let properties in either their personal name or a corporate entity, including the proposed application.
Extra Documents Paragon will require:
- Portfolio Spreadsheet
- Business Plan (at Underwriter Discretion)
- Cashflow Forecast (at Underwriter Discretion)
- Asset and Liability Statement (at Underwriter Discretion)
How Santander will apply the changes?
If you own four or more mortgaged let properties either on your own or with anyone else, Santander will consider you a portfolio landlord.
Santander is effectively pulling out of Portfolio Landlord Finance when the rules come into effect on Monday 24 July.
Santander will not offer mortgages for portfolio landlords capital raising.
Santander will offer mortgages for portfolio landlords remortgages (without capital raising) if:
- Property was purchased before 1 January 2017.
- No additional BTL lending has been taken on or after 1 January 2017 (evidence required).
- You are on £25k and have no more than 4 buy to let properties.
You are on £50k and have no more than 5 buy to let properties with Santander or no more than 7 BTL properties altogether (mortgaged or otherwise)
Santander seems to have pulled out of BTL Capital Raising Remortgages for portfolio landlords altogether. They seem to have put aside landlords that have increased the portfolio after January 2017. As well as being restrictive on the size of your portfolio with them and in the background - mortgaged or not.
This in addition to Santander high rental stress tests (145% at 5.5%), offering no Limited Company BTL products , applicant required to be employed (not full time landlord) and a maximum of 75% LTV. Suggests Santander is pitching to none-portfolio small landlords.
How Accord will apply the changes?
Accord will assess the competency of a portfolio landlord by taking into consideration their experience.
Assess the financial strength with full property portfolio spreadsheet, outstanding mortgages along with asset and liabilities.
All background properties must collectively meet a minimum rental calculation of 135 per cent interest coverage ratio at a stressed rate of 5 per cent.
How BM Solutions will apply the changes?
BM Solutions has confirmed it will lend to landlords with four or more mortgaged properties under the new rules, but has not yet announced its criteria.
How Coventry Building Society will apply the changes?
The Coventry Building Society are implementing changes from 14 September 2017 and will consider a portfolio landlord to be a client who has four or more buy to let mortgaged properties.
The Coventry will require a full property schedule of the portfolio landlord including unencumbered properties (value of each mortgage, monthly mortgage repayments, monthly rental amounts and estimated property values).
The lender wants this in order for the case to meet background property Loan to Value (LTV) restrictions and Rental Stress Test Restrictions.
With a maximum of 65% LTV across the whole portfolio and a stress test for the whole portfolio being 125% at 5.5%, with no single property below an ICR of 100%.
They have a restriction of 3 properties (or £1 million) with Coventry Building Society Group and a maximum of 10 with any lender.
In addition, no more than 3 properties should have been acquired within the last 12 months.