The purchase of buy to let property is invariably made with the help of a buy to let mortgage. The essential principles on which that lending is made are quite different to those for owner occupiers and the distinctions are outlined by the Council of Mortgage Lenders (CML):
- the amount of any mortgage is calculated according to the estimated rental income received from tenants; and
- buy to let mortgages are generally interest-only mortgages – since landlords are typically planning to repay the mortgage upon the eventual sale of the let premises.
Prudential Regulation Authority (PRU)
In addition to codes of conduct promulgated by the Council of Mortgage Lenders, mortgage lending – including buy to let mortgages – is also regulated by the Bank of England’s Prudential Regulation Authority (PRU).
Their role has a particular impact on determining the criteria to be used by mortgage lenders is assessing the affordability of loans to borrowers – including buy to let mortgage applicants.
In recent years, the PRU has been steadily raising the affordability test – based on the proportion of mortgage repayments to be met by the borrower compared to the rental income received. Steadily higher rental yields are required by the PRU as evidence of the affordability of the mortgage borrowing.
Most recently, the PRU has turned its attention to the borrowing rules for investors in portfolios of let property, introducing still closer scrutiny of buy to let investors and the affordability tests lenders must apply.
The impact is described in a report published by the Telegraph newspaper on the 21st of August 2017.
With effect from the end of this month (September 2017), if an investor already owns a portfolio of more than four buy to let properties, any new application for a further buy to let mortgage is scrutinised not just with reference to the single property in question, but to the whole of the landlord’s portfolio holdings.
The new requirement is a for a full and thorough analysis of the performance of the whole of the buy to let portfolio before a decision is made whether to advance any further mortgage for the purchase of an additional buy to let property.
The PRU does not set out absolute conditions on the way this assessment is to be carried out, and different mortgage lenders may adopt their own methods. Factors likely to be taken into account, however, might include:
- the combined rental income and cashflow across the whole of the portfolio;
- the mortgage borrower’s experience and the success of his buy to let business in the market;
- the investor’s total assets and liabilities, together with any other sources of income that is being generated elsewhere, beyond the buy to let portfolio; or even
- the part of the country or the neighbourhood in which the intended new buy to let purchase is to be made.
Naturally, this represents a significant change in the way in which affordability is calculated. The success – or otherwise – in the performance of the whole of the portfolio is used to assess the affordability of any new borrowing. If the properties in the current portfolio are not showing impressive yields, for example, new borrowing on a further property may be deemed unaffordable – even though the evidence points to its being a potential income-generating success in its own right.