Buy-to-let empires face a regulatory revolt

Building your own buy-to-let empire? Watch out. From the end of this month, lenders will have to take a more stringent approach to buy-to-let mortgage applications from landlords who own four or more mortgaged properties ("portfolio landlords"). Currently, most lenders assess a buy-to-let application based on the achievable rental income and the property's value. But from 30 September, lenders will be required by the Prudential Regulation Authority, a financial regulator, to assess the affordability and profitability of the portfolio as a whole each time a landlord remortgages a single property.

Any landlords planning to submit a mortgage or remortgage application should get their paperwork in order. Lenders will stress-test background portfolios against new rules to ensure landlords are not over-committed and they are unlikely to rely on the borrower's own spreadsheet for details of rental income versus mortgage payments, explains Steve Olejnik from broker Mortgages For Business. When applying for finance, all portfolio landlords should expect to be asked for bank statements, tax returns, assured shorthold tenancy agreements, rental accounts and potentially income and expenditure statements.

This extra paperwork means lenders are likely to take longer to process applications, and some landlords may be turned down because they don't have sufficient equity across their portfolio. Although some lenders claim the new rules will make little difference to their underwriting process, others have decided not to devote extra resources to the checks, and opted out of the market. This will cut down on the number of products available to landlords and make the sector less competitive which is likely to mean higher mortgage rates.

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For an idea of what to expect in practice, The Mortgage Works (the buy-to-let arm of Nationwide) has confirmed that it will run a full affordability assessment on a borrower's entire portfolio to ensure it meets an interest cover ratio (the amount by which rent received must cover the mortgage interest payments) of 145%, or 170% for multiple-occupancy properties. Depending on complexity, they may also ask for proof of income, an asset and liability statement, and a business plan outlining the landlord's future plans. By contrast, Aldermore Bank plans to split landlords into two categories. Those with ten or fewer mortgaged buy-to-lets will have to provide a portfolio schedule and business plan on top of the usual data. Those with 11 or more will also need to provide a 12-month cash-flow forecast statement and an asset and liability statement, as well as undergoing a face-to-face interview.

Santander will restrict lending to portfolio landlords to like-for-like remortgages only, which rules out those looking to buy a new property or raise capital from existing ones. Accord Mortgages will assess a landlord's experience, their full portfolio, and any outstanding mortgages, along with their assets and liabilities. Properties must collectively meet a minimum rental calculation of 135% interest coverage ratio (ICR) at an interest rate of 5%. Finally, Paragon has implemented new underwriting criteria since 17 July and says the new standards require only minimal changes. Landlords with three or fewer properties will be directed to its sister company Mortgage Trust.