Property has always been seen as a sound investment, and, while it may be subject to fluctuations in the short-term, over a longer period of time, it is always likely to be a profitable investment. As property prices boomed, casual property investors became landlords with multiple property ownership. The buy-to-let market was born. Hiten Ganatra, of Visionary Finance, explores the new mortgage rules for portfolio investors:
Multiple property owners
It is estimated that around one in 30 adults is now the owner of multiple properties. But with many first time buyers struggling to get on the property ladder, the Government, through the Prudential Regulation Authority (PRA), has introduced new rules for those looking to buy properties for this reason. The new rules – effective from 30th September 2017 – are not intended to prevent or harm the buy-to-let market, but rather to make it fairer for all concerned.
New mortgage rules
Many of the changes only affect a landlord of four or more properties who are considered to be portfolio investors under new rules being put in place by the PRA. The major change means that lenders will now assess a portfolio in terms of total income, rather than as individual cases, in order to assess the potential impact of any new borrowing that the investor may want to take on. The idea is to ensure that any new borrowing does not adversely affect the overall affordability of other properties already owned.
This will fundamentally mean more work for lenders, who will now have to carry out further checks on the portfolio owned by the potential borrower and determine whether it will become too much of a burden, by carrying out an interest coverage ratio (ICR) over the whole portfolio and determine any weakness. Additionally, the lender will probably also take into account the landlord’s individual earned income/salary and assess whether they are likely to default on any new borrowing or have to use it to support other properties.
What this means for landlords
This means that for landlords who already own four properties in their portfolio, or currently own three and are looking to buy at least a fourth, are likely to find that they are more limited in the choice of lender and may not get such advantageous interest rates. The whole application process is likely to take a significantly longer time to complete, too.
But interest rates are still historically low, and landlords are collecting good yields on their properties. Generally, the Government has left the market alone, but the current growth of the market means that the financial establishment want to ensure that it remains buoyant, even if that means applying these new rules.
Impact on asset classes
The overall intention is to ensure that this asset class remains just that and doesn’t become a liability for its users. Asset classes are used to split up a number of different tangible forms, usually identified as cash, shares, property, and fixed-interest securities – also known as bonds. Generally, of these, shares and property are the most unpredictable, and, since fewer private people invest such large amounts in shares as property, it hasn’t attracted the need for such streamlined legislation.
A property portfolio is still an excellent long-term investment, but to ensure that it remains that way, the Government and financial establishment are keen to check that extended investment doesn’t extend the financial burden on the borrower, and that is the main purpose of the new rules.