Underwriting standards and the buy-to-let business
Recently there have been several announcements in the press about buy-to-let mortgage providers tightening up their lending criteria. Skipton and Leeds Buildings Societies, Santander and New Street have all announced changes. NatWest has just released details of changes to its underwriting processes while stressing that it will continue to support investors. If you’re wondering what’s going on, read on.
The changes are a result of a review by the Prudential Regulation Authority (PRA) which is part of the Bank of England (BofE). The PRA has been considering issues such as affordability, especially in the light of the changes to mortgage interest tax relief, and new guidelines will be in operation from 30 September this year. The aim will be to prevent a return to pre-credit crunch lending standards and the consequent problems.
In short, the effect of the BofE guidelines will demand a toughening up of interest cover ratios and a wider view of the borrower’s economic circumstances. Where previously, personal income wasn’t a major consideration for a buy-to-let mortgage, with the assumption that rental income would cover repayments, now it’s likely to be a factor in the decision.
Working towards a more robust system and one that is more able to tolerate potential future interest rate increases makes sense. There will, however, be borrowers unable to secure the finance they were seeking.
As part of the changes, lenders will now have to have more robust underwriting in place for portfolio landlords – and the guidelines class four mortgaged properties as a portfolio. Even though the portfolio landlord is often more professional and has spread their risks they are now likely to be asked for even more financial information to support a mortgage application.
A summary of the NatWest changes
- The total number of buy-to-let properties it will allow a landlord customer will increase from 4 to 10, including any properties mortgaged with another lender.
- Interest cover ratio will reduce from 5.5% x 145% to 5.5% x 135%.
- Anticipated rent must continue to meet a minimum rental cover calculation of 5.5% x 125%.
- The maximum aggregate customer borrowing allowed will be increased from £2m to £3.5m.
- All customers will be required to meet the lender’s standard buy-to-let minimum income of £25,000.
The changes are being driven by regulations, and the exact interpretation will be down to the individual provider’s commercial decision and risk profile. Leeds Building Society, for example, says that it will not change existing LTV limits, interest coverage ratio or stress rates, but is increasing its maximum portfolio size from 8 to 10 mortgaged properties. Its director of product and distribution Jaedon Green says: “We’re committed to supporting landlords and the buy-to-let market so will continue to accept mortgage applications from portfolio landlords after 30 September.”
And the likely impact?
The impact will be felt across the whole sector. Overall the move will reduce the likelihood of lending to marginal businesses. It’s possible, therefore, that in the short term the changes could restrict growth in the buy-to-let sector. Other consequences could include an increasing professionalism in the market, more portfolio landlords and an increased interest in higher yielding properties. Watch this space.