New PRA Buy-To-Let Changes For Portfolio Landlords (September 2017)
In September 2017 the Prudential Regulation Authority (PRA) will bring in new rules affecting portfolio landlords.
Buy-to-let mortgage lenders will have to complete a total portfolio assessment for any landlord with 4 or more properties. Choosing the right buy-to-let mortgage lender now requires a lot more consideration and careful calculation to ensure we are using the most cost effective mortgage product from the lender offering the right rent to loan calculation.
New PRA Buy To Let Changes to the Rent to Loan Calculation
The old rules of 125% @ 5% can still apply but only if you are remortgaging with no capital raising and only via a few lenders.
Most lenders have now adopted new rental calculation rules. The way lenders have adapted the new PRA rules varies.
With regards to the first part of the calculation; this can vary depending on your taxable income and the number of buy-to-lets you own. It can vary from 125% of annual rent to 145% of annual rent.
Those with an income at the basic rate of tax (often including all gross rent from current and proposed buy-to-let properties) will at best be able to use 125%. A basic rate of tax of 20% is applicable to an income up to £33,500 for the 2017/2018 tax year.
Limited company buy-to-lets can also benefit from 125% in the first part of the rent to loan calculation.
The second part of the calculation is defaulted to 5.5% for most lenders, however, 5 years fixed rates can be stressed at the 5 year fixed rate with some lenders. In 2017 we have seen 5 years fixed rates released at sub 3% although currently sub 4% is more common.
You can generally borrow the most if you buy in a Ltd company name (or are a basic rate tax payer including gross rental income from all properties including the purchase property) and take a 5 years fixed rate.
Rent to loan examples
£1,200 pm rent. Additional, higher rate tax payer on a 2 years fixed rate = £1,200 x 12 (to annualise the rent) /145% /5.5% = A loan of £180,564.
Now take the same rent for a Ltd company using a fixed rate of 3% for 5 years. £1,200 x 12 /125% / 3% = £384,000 loan amount.
That is a difference of £200,000 and may be the difference of being able to invest in a property or not.
Before buying in a ltd company you should consult a tax specialist and ensure that it is (or is not) the correct way for you to purchase a property. We are not tax advisers and can only advise clients of the various buy-to-let options available to them.
PRA BTL Changes September 2017 – What will the Market Look Like Post September 2017?
The market will be very different. Initially we will see mainstream lenders such as TSB pull out of lending to anyone with more than 3 mortgaged BTL’s. As they work out how they can continue to lend in the market post changes, we will likely see them come back with a method for lending to portfolio landlords with 4 or more properties. Other lenders will follow suit and will ensure they have their underwriting and processing in order before allowing the lending flood gates to open up to portfolio lenders. Some lenders will simply cease to lend to portfolio landlords.
There are some lenders that are not regulated by the PRA such as Fleet mortgages. These lenders have so far stated ‘no change’ to lending policy.
What Can Landlords do to Prepare for the New PRA Buy To Let Changes in September 2017?
- Ensure you have a comprehensive spreadsheet with all of your properties/mortgages detailed
- Some lenders such as Aldermore have stated they will need cash-flow forecasts and business plans
- You will need to show proof you are paying tax on your BTL’s so tax returns should be up to date
- Be prepared for a lender to look into your situation in greater detail. As mentioned, some lenders are asking for business plans and cash flow forecasts, bank statements, proof of income, statement of assets and liabilities….