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Portfolio landlord mortgage rules and rental cover stress tests


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I own two buy to let properties plus my residential home. All have mortgages secured on them.

I withdrew equity from one of the BTLs (Property 1) before the stricter rental cover tests came into force in 2017. I have been able to refinance since then but choice of lenders has been greatly reduced as many won't touch it due to the large size of the loan against the monthly rent. Property 1 has a value of £375k, outstanding mortgage £246k (LTV 66%), and monthly rent £1075. It is my former home and has seen good capital growth as it is in a prime residential area, but clearly it does not yield well!

The second BTL property (Property 2) has a value of £320k, outstanding mortgage £170k (LTV 53%), and monthly rent £1200.

The two existing BTLs are owned with my wife. We have so far not converted to a limited company as we have avoided the mortgage interest relief changes by making my wife, a basic rate taxpayer, entitled to the income. That is currently the plan for the new acquisitions too.

I am looking to expand my portfolio and have a goal of buying another two BTL properties this year, with hopefully more to follow. I have enough cash saved to use for deposits and fees etc. on the two new BTLs. (I may also look at releasing equity from Property 2 to increase my investable funds.)

We can assume that the two new BTLs will have significantly higher yields and wont struggle to satisfy lenders' stress tests when looked at in isolation. However, I have identified that the portfolio landlord rules may be a hurdle to my portfolio expansion plans as the low-yielding Property 1 is likely to skew the rental cover tests that lenders will run on my portfolio as a whole once I reach 4 properties.

I would be grateful for any thoughts or advice on the following:

1. At what point do I become a portfolio landlord? I don't think my residential home counts towards the 4 properties, but I have heard that when you own three mortgaged BTLs and are in the process of applying for the fourth BTL mortgage, lenders will apply the portfolio landlord tests at that point. Is that right?

2. Is there a standard portfolio rental cover test which lenders are obliged to use? Or do the exact calculations vary by lender? I have seen 145% @ 5.5% interest rate mentioned a lot. Are some lenders more flexible than this? If not, I think Property 1 is going to be a large hurdle to my expansion plans.

3. Even if I could find a flexible lender who would lend on my portfolio including Property 1, will Property 1 always hold me back when I seek to expand my portfolio and refinance? After all, each time I make a new acquisition I will be potentially approaching a new lender each time - each one will have their own view on my portfolio based on their own criteria. I don't want availability of finance to be a constant struggle as I expand. Therefore, should I consider selling Property 1 and putting the equity of £129k-ish to work elsewhere?  I'd rather not sell as I believe future capital growth prospects remain strong, but I am also keen to expand in the short term.

4. Would converting the existing BTLs and/or buying the new BTLs within a limited company help with availability of finance? I understand the portfolio stress tests may be more relaxed when it's a limited company borrower.

Looking forward to your thoughts.

Thanks

Matt

 

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1. The definition of a “portfolio landlord” is someone with four or more mortgaged properties.
... Except it does not really matter. Lenders no matter the landlord size want to know about your background portfolio.

2. There is no standard rental cover with "lenders are obliged to use" though 125% at 5.5% is a good starting point.
Some lenders are more flexible than others when stress testing background portfolio.

3. You should talk to a mortgage broker before making the determination it is hindering you. It may not be.

4. Yes LTD Company BTL does have Lower Rental Stress Tests than Higher Rate Taxpayers buying in personal name. So does getting 5 year Fixes.

In Conculsion.... I think you are worrying a little too much about the background portfolio stress tests. Lenders do conduct these but they are not as strict as you imagine. It is also on average, so your better peforming properties can blur the issue with a single property. A good Mortgag Adviser will ask you for a portfolio spreadsheet and make sure that it is not an issue with lenders before placing a case. 

The team in my signature would be happy to help you Matt. Give you peace of mind.

:wub: Get Mortgage Advice from my Team at Bespoke Finance on 08009202001 or email hello@bespokefinance.info 
:ph34r: 
Please don't take my messages on Property Hub as Personal Financial Advice, just a rambling guy passing time on a Coffee Break.
 

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Hi @Matt Bee

Happy to answer these points for you, I can see Adam has answered a few of the questions already for you too, which is fantastic.

1. At what point do I become a portfolio landlord? I don't think my residential home counts towards the 4 properties, but I have heard that when you own three mortgaged BTLs and are in the process of applying for the fourth BTL mortgage, lenders will apply the portfolio landlord tests at that point. Is that right? This is correct, the majority of lenders will assess the case based on how your portfolio will look upon completion of the mortgage with them. So upon your 4th application they will typically class you as a portfolio landlord.

2. Is there a standard portfolio rental cover test which lenders are obliged to use? Or do the exact calculations vary by lender? I have seen 145% @ 5.5% interest rate mentioned a lot. Are some lenders more flexible than this? If not, I think Property 1 is going to be a large hurdle to my expansion plans. With regards to interest cover ratios, these vary from lender to lender, with the worst case scenario tending to be 145% at 5.5% (There are exceptions where this can be higher). As Adam mentioned above, the stress testing rate is typically lower on 5 year product, for example there are lenders who will stess test the rental income at 125% and the mortgage interest pay rate.

3. Even if I could find a flexible lender who would lend on my portfolio including Property 1, will Property 1 always hold me back when I seek to expand my portfolio and refinance? After all, each time I make a new acquisition I will be potentially approaching a new lender each time - each one will have their own view on my portfolio based on their own criteria. I don't want availability of finance to be a constant struggle as I expand. Therefore, should I consider selling Property 1 and putting the equity of £129k-ish to work elsewhere?  I'd rather not sell as I believe future capital growth prospects remain strong, but I am also keen to expand in the short term. Again, Mortgage Lenders vary on their stress testing of background portfolios/properties. This can range from each property being individually stress tested at a specific rate or the portfolio being stressed as a whole (For example at 145% and 5.5%). When the portfolio is being stressed as a whole, this can benefit a individual property with a weaker rental income, as it is backed up by other properties with a stronger rental income. Additionally, there are lenders who will ignore your background properties, as long as the current mortgages are self-servicing with the rental income being received

4. Would converting the existing BTLs and/or buying the new BTLs within a limited company help with availability of finance? I understand the portfolio stress tests may be more relaxed when it's a limited company borrower. There are a number of benefits to purchasing via a limited company, for example at the moment you can still write the mortgage interest off as a tax deduct-able cost, which you can no longer do in your personal name (Unless the property is a holiday let). You are also correct in saying that limited company rental stress testing does vary from personal name, which in turn can produce increased loan sizes. There are also circumstances where limited company lending can be a less positive option, for example the interest rates can be marginally higher and there may be other tax implications, dependant on your personal circumstances, which you should discuss with a tax adviser before incorporating (For example, stamp duty implications when transferring existing properties into a limited company) I am not a tax adviser and would always recommended seeking independent tax advice. 

I hope this is helpful and answers all of your questions, but please do let me know if you have any further queries. I'd be happy to assist you.

Best regards

Nathan Cole

 

 

Nathan Cole CII (MP)

Mortgage Consultant at Private Finance

Office: +44 (0)1743 211 855

Email: nathan.cole@privatefinance.co.uk

Website: www.privatefinance.co.uk

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Hi Matt,

1. Yes, lenders will start to treat you as a portfolio landlord when you are in the process of obtaining the 4th property. This also means that some lenders will become unavailable to you, as they don't deal with portfolio landlords. It still leaves plenty of options though, but just to be aware.

2. 145% at 5.5% is indeed used a lot, but the calculations vary by lender as you said. Some lenders ignore background portfolio for the stress testing as long as it's "self-financing" (definitions differ by lender), some would include them in the calculations, etc., but there are lenders with more lenient calculations for sure.

3. Given the complexity of the subject and lending criteria, I agree with Adam that you should speak to a mortgage broker. It's not really a matter for DIY. Finding the right lender is what us brokers do, so don't worry about speaking to a new lender every time - this is what we do for a living after all.

4. Rental stress test is sometimes more lenient for a Ltd company (e.g. Aldermore), other times it's the same (e.g. Fleet), so I'd agree that if you're looking to get more lenient assessment, then it's either a matter of choosing a lender offering less than 145% at 5.5% or doing it via a Ltd company or taking a 5yr fix deal. You may also note that HMOs and multi-unit blocks also often have stricter assessment than single family let properties. 

Hope the above helps to further clarify the situation.

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