This now includes affordability testing but the Prudential Regulation Authority’s (PRA) guidelines are vague at best, asking lenders to “take a proportionate approach based on their knowledge of the borrower, their portfolio and alternative sources of income they have”.
Examples of additional information given by the PRA include:
- the borrower’s experience in the buy-to-let market and their full portfolio of properties and outstanding mortgages;
- the assets and liabilities of the borrower, including any tax liability;
- the merits of any new lending in the context of the borrower’s existing buy-to-let portfolio;
- historical and future expected cash flows associated with all of the borrower’s properties.
This means every portfolio landlord may now need to put together a business plan for their properties, with geographic concentrations, cash flows, costs and potential risks to the portfolio.
Lenders will also have to double-check properties held inside of limited companies as these are included in the four properties that determine who is a portfolio landlord.
Lenders have been a little slow off the mark in terms of being specific about what they will require, but that’s understandable when you consider that the PRA statement is only 11 pages long.
The section on portfolio landlords is only one page, while the bit on SMEs, which incorporates limited company buy-to-let, is just four paragraphs.
This means lenders have had to go to some lengths to understand exactly what they need to do to satisfy the PRA, as there is much room for interpretation.
Just a handful of lenders so far including Paragon, Santander, Aldermore, TMW, Coventry and Accord have given an indication of their requirements and these vary greatly.
It is the “proportionate approach” which is open to interpretation.
It will be no surprise if at least a few lenders keep to those borrowers with three properties or fewer as it will certainly make their underwriting simpler.
So, what can brokers do to help? Presentation of the existing portfolio is key.
Ensure the values, rental incomes and mortgages are as up to date as possible, by using tools such as Zoopla and Mouseprice and cross-referencing bank statements.
Understand your client’s strategy (for example, are they buying for income, for retirement or for capital growth?) so that you can help them present their business plan.
Gather full details of any other assets then pull the information together in such a way that you provide the lenders with reasons to lend to your client, rather than leaving them with gaps and creating reasons to say no.