A well-planned buy-to-let can be an excellent business model, but a badly prepared one can end in disaster. One of the biggest dangers is taking on a mortgage you can’t cope with, leading to debt, default and the loss of all your assets.
From the 30th September, though, the Bank of England’s Prudential Regulatory Authority arm will be cracking down on buy-to-let mortgages to make sure borrowers don’t overreach themselves.
What Is Changing?
The new regulations will cover all buy-to-let landlords, whether they’re individuals or limited companies, as well as portfolio landlords with at least four mortgaged properties.
Lenders will be obliged to have a specialist underwriting process in place for portfolio landlords, whereas other borrowers will be regulated by one of two ways, depending on how they’re proposing to finance the mortgage:
- An interest coverage ratio (ICR) test will affect borrowers who intend to use their rental income to cover repayments, setting a minimum ratio between the two.
- An income affordability test will be applied if the borrower proposes to use other forms of income to fund repayments, taking all income into account.
How It Will Change
Whether the relevant test is ICR or for income affordability, landlords will need to provide more information than at present. This will apply to any buy-to-let mortgage, whether it’s for a new purchase or for refinancing. Information required includes:
- Bank statements
- Accounts for rentals
- Tax returns
- Statements for income and expenditure
- All cash flows for the portfolio, historical and projected
For the ICR, the lender will need to consider all costs connected with the rental, such as repairs, utilities, ground rent, service charges, electrical and gas certificates, management and letting fees and council tax. The income affordability test will cover all types of income, such as pensions, investments and savings
What Will It Mean?
On the face of it, these changes shouldn’t prevent you from getting a buy-to-let mortgage, as long as you’ve prepared a solid business plan for your purchase. In practice, though, it’s going to mean a lot more work to prepare each mortgage request.
Perhaps more seriously, it’s also going to mean more work, and therefore more cost, to the lenders, which will be passed on to borrowers. In this environment, any way you can streamline the process will be an advantage. This includes investing in good property management software, which can be combined with the software you’ll need for HMRC’s digital reforms.
Feel free to get in touch for a chat if you need to talk this over.