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  • Mortgages & Finance

    LTV's to decrease through higher stress tests



    It was recently announced by the Bank of England Prudential Regulation authority that larger landlords should be subject to tougher underwriting standards.

    The PRA said that given the inherently complex nature of lending to portfolio investors, lenders should adopt a specialist underwriting approach for these landlords who are defined has having four or more properties.

    In its consultation paper, Underwriting standards for buy-to-let mortgage contracts, the PRA said it intends to establish a guardrail on underwriting standards in the buy-to-let sector to prevent these from slipping in the future.

    The paper also set out expectations for affordability testing across the wider buy-to-let market, proposing that firms use an interest coverage ratio test and/or income affordability test when assessing buy-to-let applicants.

    The details of this have now become clearer, and we asked Shawbrook Bank M.D. Stephen Johnson to give us the detail:



    The new stress test means that LTV's (loan to values) are likely to drop by default from a current maximum of 75% to around 67%, meaning landlords will typically have to put in a 33% deposit when these new criteria kick in, in Q3.

    If you would like to act quickly and secure finance before these changes are implemented, please contact the team at Property Tribes Financial Services on 01206 654444.

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    For 75% LTV tne minimum yield required will be 5.2% - so no effect for those of us in the North.

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    It is now very clear that there will be some tougher borrowing rules being implemented as far as Buy to let is concerned. Although very much still under discussion the new rules are being considered as the Prudential Regulation Authority (PRA) believe increasing borrowing is a risk to the property market.

    In many ways these new rules will be similar to those imposed on residential borrowing with far more rigorous affordability and repayment assessments.

    In terms of affordability the PRA are concerned that when interest rates rise there will be a much bigger risk of landlords defaulting on the loan, having been used to low rates of interest for so long. Albeit that rates have been low for such a long period the likelihood is that the potential for rates to rise over the next 5 years will need to be considered. Quite how this will be assessed or calculated has yet to be determined. It’s likely there will be a formula or minimum increase.

    As a result this will undoubtedly see a much bigger reliance being placed on any other income streams and the ability of that additional income to support the interest payments.

    Assessment of affordability is also going to take account of a great many more aspects of Buy to Let ownership and this is likely to include any cost associated with owning and renting out the property where the landlord and not the tenant ultimately has the responsibility to pay. If personal income is part of the assessment then this in itself will be far more severely broken down and as a residential mortgage is appraised, all commitments, expenses and monthly living costs will have to be accounted for.

    Obviously the normal stress testing which currently applies to Buy to Let will continue but whereas lenders tend to have their own internal formula on this it is proposed that a minimum rate of 5.5% is applied across the board. This could in some instances disallow a number of transactions from going ahead.

    One of the other proposals under consideration is the definition and treatment of what the PRA term a Portfolio Landlord. It is their intention that any Landlord with four or more properties WILL be a Portfolio Landlord.

    PRA figures suggest that Landlords that own a portfolio of properties have far more instances of arrears than those that don’t. It therefore suggests that lenders should be underwriting such Landlords in a different way. The belief being that there is far more complexity and difficulty with this form of proposal.

    You probably read the above with a degree of incredulity and see much of that proposed as being excessive and without much foundation. The fact is that some or all of these proposals or a blend of that proposed will be implemented and soon.

    In the near future we will have to accept the following as being the new normal

    ·         Lower LTV facilities

    ·         More rigorous underwriting

    ·         Attention to additional income streams

    ·         Affordability to be analysed and investigated

    ·         Buy to Let lending will no longer sit apart and without reference to other financial commitments

    That’s the future but it isn’t the NOW. It isn’t today and it isn’t stopping us taking advantage of the situation, products, underwriting and criteria available to us now.

    Whatever happens NOW is the time to get a handle on where you are TODAY. What IS your situation? Is there a better structure, a better product, a better deal available?

    Make time to prepare for tomorrow because tomorrow IS coming. If you knew it was going to rain tomorrow you would get your coat and umbrella ready today. That’s what you need to do. This change will come so plan for it and be ready and who knows you may be able to face it on your terms.

    Give me a call on 07716647928 or email on mark@ptfs.co.uk and let’s have a quick chat about what we might be able to do to help. A FREE financial review might just put you on the front foot.

    Mark Alefounder

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    Mr Mark Alefounder

    Mortgage & Protection Broker

    Optimum Independent Financial Advisers

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    This question has to be asked, so I might as all do it here and now: what do we think the effect, if any, of all this will be on lending to the new companies set up to sidestep Clause 24?

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    Its a strange world indeed

    The South has had such a good ride on BTL

    The North has not had the same ride or luck we are still below the peak prices of 2008 and rents have gone up very little

    The New Mortgage Rules will not hit the Northen Landlord who buys on yeild (Small Can Be a good thing )

    It will be interesting to see where the new lending rules take us

    I always looked up to the Southen Landlord who saw great gains But the way its tuning out in this silly world I think the South is in for one hell of a ride

    The Gains Southen Landlords hve made may well go in Taxation one way or another



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    Learn Change and Adapt ?????

    All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.

    I think the LTV will turn out to be lower than 67% for higher rate tax payers

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    To expand on my question above (written on-the-fly in a spare moment!), my train of thought was, if lenders will want personal guarantees to back up a new company with no track record, would that mean that all the proposed criteria for individual borrowers would kick straight back in again, or does it not generally work like that? Otherwise, if/when those tighter criteria do commence, it could be that company borrowing becomes easier than individual borrowing.

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    As the video outlines - loan to values are not dropping.

    There will be tighter Rent-to-Interest Formulas which may limit how much you can borrow, the LTV's remain uneffected.

    Many lenders already implement rent-to-interest rates higher than what the PRA has proposed, a few less and a few higher.

    A comparison is someone saying "LTV has dropped because i got paid less" - nope you can not borrow as much as affordability does not reach what it did before.

    I wrote about the PRA Consultation - a few weeks back titled - 20% of Buy-to-Let Market to be Cut.

    It is Portfolio Landlords that are going to have bigger hurdles to jump trough including:

    • training/competence as a landlord
    • assets and liabilitaties assessment
    • tax assessment
    • overal btl portfolio assessment
    • historical nd future cash flow assessment.

    Basicly - a full business banking loan overview. Get your Business Plans and SWOT analysis as the ready!

    Landlords trying to escape the mortgage interest relief via a Limited Company would not be surprised that the PRA outlines the minimum standards will be enforced "regardless of weather the borrower is an individual or a company".

    by the way - if you do not like these proposals (who does!). This is a consulation - so you should consult the PRA/Bank of England about them.

    I dont think this (like the stamp duty) will effect many Northern Property Investors. All these changes seems to be limiting southern property investors.

    If you get a chance to talk to the MD again Vanessa - I would love to here his thoughts about the Government removing the Shawbrooks ability to self-price risk.

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    Roughly roughly what do you think a sensible level of deductions from the gross rent should be to do some rough cut calculations around affordability as per the latest PRA consultation?

    The wording from the PRA consultation is

    To ensure that firms are being prudent in their affordability assessment, the PRA is proposing that firms, among other things, give consideration to:

     all costs associated with renting out the property where the landlord is responsible for payment;

     any tax liability associated with the property; and

     where personal income is being used to support the rent, the borrower’s income tax, national insurance payments, credit commitments, committed expenditure, essential expenditure and living costs.

    For a basic rate taxpayer, I am thinking 10% of the gross rent is a sensible number.  For a higher rate taxpayer, 30% of gross rent - to take account of the additional tax burden from C24

    Does that feel about right? Too high?  Too low?

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    "where personal income is being used to support the rent" ?!

    What does that mean?

    My rents support my income.




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    As it should be Peter - this is for properties in which the Rent to Interest does not meet the minimum.
    A few lenders allow those with high disposable income, with properties that dont meet that test. Basicly saying "If rent does not meet my mortgage payments, im happy to pay our of my own pocket". Typicaly a rare southern attitude to property investment, in which they are gambaling on capital appreication rather than rental yield.

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    THIS PROPERTY TRIBES ACCOUNT IS NO LONGER USED.
    DO NOT SEND PRIVATE MESSAGES.

    --- MORE INFO HERE ---

    YOU CAN REACH ME AT BESPOKE FINANCE or MY TEAM AT 08009202001