Buy-to-Let investors to face new restrictions on their ability to borrow

Mortgage News

BTL mortgage lenders increase stress tests.

Buy-to-Let investors face the prospect of new curbs on their ability to borrow. The Bank of England’s Prudential Regulation Authority (PRA), which monitors the soundness of banks and other lenders, has recently published a consultation paper. Its aim is to lay down underwriting standards that it thinks will prevent landlords getting into mortgage payment difficulties if they have a shock to their system or if interest rates rise.

The PRA wants lenders to assess either whether the monthly rental income from the property is enough to cover the mortgage, or whether the landlord has enough money – along with rental income – to keep paying the mortgage. It makes clear that affordability should never be based on the value of equity in the property used as security for the mortgage, and nor should lenders rely on predictions of rises in house prices to justify loan sizes.

The first of these tests requires lenders to calculate an interest coverage ratio, the relationship of the expected monthly rental income to the monthly interest payments. The PRA says this should be a minimum of 125% but recently we have seen lenders increasing this to 145%. The calculation takes into account all costs of the buy-to-let, including estimated voids, council tax, repairs, letting agent fees and utility costs.

Tax liabilities also need to be incorporated into the sums, including the changes resulting from the government’s limits on mortgage interest tax relief, due to start next year (from 2017 onwards the tax liability will step up year on year until 2020).

A borrower’s affordability is assessed under a hypothetical borrowing rate of at least 5% over a minimum of 5 years from the start of the mortgage. Many lenders have already increased the rate of interest it uses from 5% to 5.5%. In addition to this, some lenders are going so far as to access a borrower’s income in addition to these stress tests which could prove problematic for some buy-to-let landlords.

If you are already a have a buy-to-let property or you are thinking of buying one then talk to us first so we can discuss your options. To arrange a meeting, or an initial chat over the phone, with one of the mortgage team email your details to info@plutuswealth.com.