New BTL Mortgage Underwriting Standards

Thrugelmir

New underwriting standards are going to shake the tree a little.

http://www.bankofengland.co.uk/pra/Documents/publications/cp/2016/cp1116.pdf

The Bank of England has today revealed plans to clamp down on the buy-to-let market, setting out strict new rules for banks underwriting buy-to-let mortgage contracts.

In a new paper out today, the Prudential Regulation Authority (PRA) said lenders will need to meet a minimum set of requirements before underwriting buy-to-let mortgage contracts, including assessing the borrower’s ability to cover costs associated with letting out their property, such as tax liabilities. The PRA also said lenders will need to consider borrowers’ non-rental incomes, as well as whether they would be able to cope with future interest rate rises to levels as high as 5.5 per cent.

So-called portfolio landlords – people with four or more mortgaged buy-to-let properties – will also face extra scrutiny under the new rules.

http://www.cityam.com/237681/bank-of-england-clamps-down-on-buy-to-let-market-with-strict-new-rules-for-mortgage-underwriters

princeofpounds

Personally I have often felt that the way the banks lend to BTL has been too generous.


Historically the calculation has basically been to lend at a very slim margin on top of the banks' own funding costs, and rely on the equity and some rental/interest multiple to protect the bank against any fall in value.


The big problem with this approach is that whilst it makes sense on an individual property basis, it doesn't take into account the general position of the property owner themselves, resulting in many individuals running what are basically speculative debt-fuelled businesses on their own personal balance sheets.


Interestingly a lot of the banks lending out on this kind of basis wouldn't actually lend to corporations with the exact same financial position as the individuals.


These practices also don't account for the systemic impact of the lending - what is optimal for an individual loan may well not be optimal for the banking system.


I have little idea if these specific regulations really address the systemic issue properly, but I can certainly understand why they feel the need to tighten up.

Generali

The BoE appears to address systemic issues quite explicitly.

The BoE seems to have two really big concerns and then some proposals that flow from them:

1. Lenders' business plans will require them to loosen lending standards to a degree the BoE feels represents a risk.
2. Lenders or borrowers (or more likely both) have been misrepresenting loans to BTLers as loans to 'SMEs' (small and medium enterprises) and that this must stop.

They are making it clear to lenders that a BTL business isn't an SME and so the capital requirement for the purposes of keeping reserves should be set at the higher BTL level rather than SME level when lending to a BTL business.

cells

it says no limit to LTV. have a interest to rental cover. have a min 5.5% pay rate on the calculations and more if you expect interest rates to exceed this within 5 years (unless its a 5 year or more fix)

slightly tougher regulations for landlords with 4 or more mortgaged properties. that one might be particularly bad if lenders just say no to anyone with 4 or more BTLs

they stilll expect the BTL books of banks to grow even with these changes and the tax changes but that it will be 10-20% smaller than it otherwise would be

lenders need to take into account the tax changes, specifically the mortgage interest changes.

suggestion that the 125% rental cover is not expected to fall and may rise due to lenders now having to consider the tax changes and for flats the service charges and other small costs like insurance and voids.

re-mortgaging exempt from some of this to not harm existing investors.

cells

Generali wrote: »

The BoE appears to address systemic issues quite explicitly.

The BoE seems to have two really big concerns and then some proposals that flow from them:

1. Lenders' business plans will require them to loosen lending standards to a degree the BoE feels represents a risk.
2. Lenders or borrowers (or more likely both) have been misrepresenting loans to BTLers as loans to 'SMEs' (small and medium enterprises) and that this must stop.

They are making it clear to lenders that a BTL business isn't an SME and so the capital requirement for the purposes of keeping reserves should be set at the higher BTL level rather than SME level when lending to a BTL business.

my reading of the document suggested its only a small portion of lenders applying for the SME discount on capital holding

and that for lenders to grow their BTL books might require them to chop away at underwriting standards and that they dont want underwriting standards to decline

all in all they still expect the BTL books to grow dispite both these suggestions and the BTL interest tax changes and stamp duty changes

cells

my only concern in this document is that landlords with 4 or more properties might be singled out by lenders not really as a higher risk but since they need more checks and balances lenders may just say no to them full stop

a lot of lenders already have a limit of 3 properties with them they might just change that to 3 properties with any lender.

That would make it harder for the bigger landlords to refinance or more costly to do so.

everything else seems more or less the same as it is now.
slightly more costs to take into account of eg service charges and insurance etc which currently is just in the 125% cover

westernpromise

I'd be on 158% cover at 5.5% base rates and I'm at 771% cover now, so I'm quite happy.

michaels

Interesting for all the talk of the changes causing a switch from btl to OO, the BOE merely see them as slightly slowing the shift in the opposite direction. Not what the Crashy would want to hear I suspect....

Generali

westernpromise wrote: »

I'd be on 158% cover at 5.5% base rates and I'm at 771% cover now, so I'm quite happy.

Does that include the tax changes?

cells

Generali wrote: »

Does that include the tax changes?

I think youve fallen into the crashy mindset. a lot of rental properties are mortgage free a lot of what remains are on low LTVs pretty much like the owner pool of homes

There must be a very large number of properties inherited each and every year. I think maybe as much as 300,000 properties per year (maybe more) are left as inheritances and virtually all of them with no mortgage at all.

How many of them become no mortgage rentals?
How many of them are sold on and become the deposits for 50% LTV rentals?
How many people get significant non home inheritances of hundreds of thousands and then buy property outright with it?

The Wilson model is the exception not the norm.
The banks provide a lot of capital to the economy but dont think for a moment there isnt huge amounts of capital in other forms in such a rich country like the UK

Generali

cells wrote: »

I think youve fallen into the crashy mindset. a lot of rental properties are mortgage free a lot of what remains are on low LTVs pretty much like the owner pool of homes

No I haven't. I'm trying to get a concrete example of what the tax and rule changes mean before I have a go at running the rule over a few places for myself.

You seem determined to convince yourself that a broad range of changes all of which will make the BTL market more expensive to get into and less profitable will have nil impact which seems unlikely at best.