Changes to Buy-To-Let Lending Criteria

The world of property investment and buy-to-let properties is due another shake-up with the Prudential Regulation Authority setting a timeline for further changes.

Since the government announced changes to tax reliefs available to professional landlords in the Finance Act 2015 (as amended), the Prudential Regulation Authority has set a timeline for changes to be made to underwriting criteria for their 1,500 banking, building society and investment firm members.  Implementation of those changes is due to be effected before 30 September 2017.

From April 2017 professional landlords can no longer deduct all of their mortgage interest when calculating property profit costs to assess their tax liability. For the year 2017/18, only 75% of mortgage interest can be taken into account; this is set to reduce again in 2018/19 down to 50% and again in 2019/20 to 25%.  By April 6, 2020, there will be 0% finance costs deduction for mortgage interest when assessing income earned from property.    

Lenders regulated by the Financial Conduct Authority and the Prudential Regulation Authority are required to review and align their lending criteria to ensure that professional landlords are aware of the regulatory changes and that they have assessed how these changes affect their investments. 

Affordability testing is now more stringent; lenders are required to assess whether the rental income from the property will support the monthly interest cost of the mortgage payments and they are no longer permitted to base their assessment of affordability on the equity in the property or take account of future capital growth.  Stress testing is incorporated into buy-to-let portfolio lending to take into consideration potential rises in interest rates with a recommended minimum assumption of a borrower interest rate of 5.5%.

Professional landlords with four or more distinct mortgaged buy-to-let properties are identified as Portfolio Landlords and lenders are required to operate different underwriting standards for these types of landlord, taking into account the complexity of the portfolio, cash flow and costs associated with multiple tenancies, and the landlords experience in the buy-to-let market. 

Jaedon Green of Leeds Building Society announced that they would continue to accept new applications from portfolio landlords after 30 September 2017 but they have a maximum portfolio size of 10 mortgaged rental properties. In a statement, they stated that their underwriting approach would continue to be proportionate to the complexities of each case. Commercial Property Partner at Pinney Talfourd, Julien Pritchard notes: “This will have a negative impact on investors who require lending as it becomes more difficult to fund buy-to let properties. On the flip side, it may make access to the market for first-time buyers easier if price pressure eases; as ever, only time will tell what the long term implication for the property market will be.”

Shawbrook Commercial Mortgages commissioned a think tank to provide a future view of the buy-to-let market and their data indicates that buy-to-let remains a well-capitalised investment rewarding thoughtful investors who seek specialist advice.    

MORE INFORMATION 

If you’re a professional landlord and would like more information on the impending changes, please contact our Commercial Property Department – our team of expert solicitors will be able to assist. Call on 01708 229444 or email us using the form above. This article was written by Keeley Miller, Senior Associate at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of August 2017.