New rules are now in force as the Bank of England’s Prudential Regulation Authority imposes stricter financial tests before approving borrowing to landlords who own 4 or more mortgaged investment properties that they rent out.

Some lenders will withdraw any further buy-to-let mortgage loans while others are preparing to create new systems and processes to deal with the additional underwriting requirements.

Prior to September 30th, a portfolio landlord was only required to provide an overview of any other buy-to-let properties when applying for a new loan.  Under the new PRA rules, each mortgage must be assessed individually and shown to be financially viable for the individual to qualify for further borrowing.  (Rental income must be a minimum of 125% of the mortgage payment at a notional interest rate of 5.5%.)

Lenders may differ in their responses to these new affordability but they will all be required to ascertain the following as a minimum:

  • landlord’s income and outgoings
  • assets and liabilities
  • property investment experience
  • past and future rental income cash flows
  • tax liability

Landlords can prepare by creating a spreadsheet containing the required information for each property and keeping it up-to-date.

The effects of these changes could mean that the buy to let lending process will be more time-consuming and costly with regard to fees and interest rates. The reduced competition due to some lenders no longer offering buy-to-let products will also have an impact.