Under the Prudential Regulation Authority (PRA), as of 1 October 2017, property investors are classified into two categories:
- Ordinary landlord: if you own 1-3 properties, including property intended for purchase or refinance at any time
- Portfolio Landlord: if you own 4 or more properties
If an investor is buying via a limited company but already owns three properties in their personal name, they will be considered as a portfolio landlord.
The level of shareholding within a property is irrelevant. If an investor is a shareholder and a property is mortgaged by the company, that property will count as one of the properties owned by that investor.
The classification for ordinary landlords is considered as straight forward, whereas the underwriting process for a portfolio landlord is considerably more complicated. Find out more about what the process involves for both categories.
Potential impact of changes
- The additional burden may result in lenders requiring more underwriters to cope with the increased analysis required which may result in pricing structures increasing.
- The time to assess an application is also likely to increase compared to an automated online process most mortgage brokers and customers are familiar with.
- Less funding is likely to be available where gearing is in excess of 75%. Indeed, investors may be required to deleverage the higher loan to value properties to reduce the overall loan to value ratio across the portfolio.
- More scrutiny will take place in relation to an investor’s tax position. There will be an assumption that a portfolio landlord is a higher rate tax payer. If this is not the case, they will have to produce evidence to show this.
- Investors will need to provide evidence to demonstrate that they have sufficient income to support their personal living expenses.
- Lenders may require proof of all rental payments received over the last 12 months (by way of bank statements etc.).
If lenders have been reliant on an online assessment – “computer says yes/no” approach, this will have to change. In order to avoid incurring additional costs, investors should perhaps delay obtaining a valuation until they know that the lender has credit approval for their transaction.
Some lenders may pull out of the portfolio landlord market altogether and focus purely on the investors who have 1-3 properties.
According to the consultation paper issued by the Prudential Regulation Authority, they estimate that their proposals will lead to a decrease in the number of new approvals for buy to let mortgages by about 10 to 20% by 2nd March 2018 leading to a lower value of the stock of buy to let mortgages.
The intention of the proposals is clearly to improve the safety and fairness of PRA regulation firms by ensuring they take full account of further interest rate rises in their buy to let underwriting assessment.