4 ways the new PRA rules will change things for buy-to-let landlords

4 ways the new PRA rules will change things for buy-to-let landlords

Big changes are afoot for buy-to-let landlords, as a result of the Prudential Regulation Authority rules.

The PRA is the body responsible for the supervision and regulation of building societies, banks, insurers, credit unions, and some investment companies. They set the rules which lenders follow.

The latest PRA standards came into effect on September 30, 2017, and there are several implications for those applying for buy-to-let mortgages:

1. If you have four or more buy-to-let properties, you are classed as a portfolio landlord – even if they are all on the same mortgage.

2. Portfolio landlords face stricter checks – if you use personal income in your application, you face checks on your personal income and expenditure similar to those applying for residential mortgages. Lenders are checking credit cards, loans, vehicle finance, other mortgages, living costs, and any tax liabilities. You should speak to your accountant or qualified tax adviser for advice on tax. Your broker or lender could help you calculate how future tax liabilities might affect your personal income.

3. If you’re using rent as part of your personal income, rental incomes now need to be verified and checked against other rents in the area. Lenders are also looking at rented housing demand in the area. Future income figures are being checked by an independent value or using valuation tools and existing rent agreements. This is particularly important for landlords who are using existing rents to expand their portfolios.

4. Specialist underwriting is now used for portfolio landlords – so lenders may well carry out extra checks on these applications. There are checks on your business plan, assets, cash flow, landlord’s experience and portfolio, and liabilities. Lenders are looking at your outstanding mortgage balances and the future tax implications of your property business.  They also use data from credit bureau to check your information, particularly the total number of mortgaged properties.

It’s also worth noting that the affordability of an application is still determined by a key factor – the interest coverage ratio. This is the ratio of rent earned to the interest being paid on the mortgage. This can be 145% of the rent to ensure costs are covered and interest relief changes do not affect the affordability of a buy-to-let mortgage.

So, what can you do?

Get your house in order to comply with the new PRA rules.

It’s time to look at your personal and business finances, get your business plan up to date, and reduce liabilities where you can.

That means looking at paying off any credit card debts or outstanding loans.

It’s also important to get independent advice from property finance specialists. They can help you prepare your application to maximise the chance of it being accepted by lenders.

Getting advice from Gareth at Cornerstone Finance was invaluable in helping us to fund our project. From start to finish, the advice offered was clear and simple to understand, the rates offered were the best we could find anywhere and overall the transaction was made very simple. Would definitely use Cornerstone again and would highly recommend to anyone.

Alice Selby
Property Developer

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