TPP229 The mortgage shake-up you need to understand
It's Meetup night tonight, and we're hoping lots of you are headed to our free and friendly gatherings all across the UK and beyond. If you haven't yet booked your ticket you can find your nearest location here. Rob B is heading to the coast, and will be in Bournemouth saying hi to some local Hubbers there.
Now, on to this week's episode which is all about a shake up in the mortgage market that may have just slipped under the radar. Now, some of you won't be affected by this at all but some of you really will so you wont want to miss the details.
So, the Bank Of England has an arm called the Prudential Regulation Authority (PRA) that regulates lenders. They’ve brought in new rules that lenders must follow, to avoid the risky lending that contributed to the last crash.
This is happening in two parts:
- Tougher rental cover tests, since January 2017
- “Portfolio landlord” underwriting, from September 2017
So what are the rules on rental cover:
- The rent must cover at least 125% of the mortgage payment when the interest rate is at least 5.5% – but many lenders are using 145%
- Rule of thumb - each £100 of monthly rent will support £15,000 of borrowing
- So £500 rent = £75,000 borrowing. If it costs £100k, you’re fine. More than that, you’ll need a larger deposit = lower ROI
- However this doesn't apply to:
- - Mortgages for limited companies
- - Bridging lending
- - Commercial or semi-commercial property
- - Holiday lets
- - Any loans with a fixed term of five years or longer
- Effect: You won’t get as much leverage for lower-yielding properties
What about the forthcoming portfolio Landlord underwriting?
- So the definition of “portfolio landlord” is someone with 4 or more mortgaged properties
- Any properties in a Ltd Co also count towards the total
- Every lender can decide what they want to see, but PRA suggests they look at:
- - Property portfolio spreadsheet
- - Cashflow forecast spreadsheet
- - Income and expenditure spreadsheet
- - Business plan
- - Three months' bank statements
- - SA302s and tax overviews from HMRC
- - Tenancy agreements for all properties
- Basically you need to make a case for the new loan in the context of your entire “rental business”, not just the property you’re buying
- Effect:
- Slower applications because more for lender to look at
- More declines, because there’s more they could decide they don’t like
- (Doesn’t apply to Ltd Companies, but they have to do most of this anyway)
So what does all of this mean?
- The rental cover tests means bigger deposits in London and a few other areas, but shouldn’t affect elsewhere
- Portfolio Landlord criteria will make for painful applications, but it’s hard to be annoyed about it because if you were going for a business loan they’d want to see all this stuff - and it is a business
- BUT it’s yet another measure that will deter amateur landlords...which could play into the wobble and mean opportunity for investors who are serious
News story of the week: Research reveals extent of price drops by property agents in London
35% of London properties have had a price reduction since they were first marketed.
Nationally, 77% of properties are selling below asking price.
Wobble time? Maybe so. It certainly looks like a buyers market right now.
Resource of the week
http://podsync.net/ is a simple and free service that lets you listen to any YouTube or Vimeo channels, playlists or user videos in podcast format.
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