Buy-to-let landlords face tougher borrowing rules under the plans by the Bank of England’s regulation arm, the Prudential Regulation Authority (PRA) These changes under consultation include more stringent affordability and repayment assessments amid warnings that increasing levels of lending pose a severe risk to the UK property market. Affordability testing: The PRA want lenders to make income checks tighter for the buy-to-let investor to reduce the probability of defaulting on a loan especially when interest rates rise. Currently rental income and capital growth (increasing value of the property) are important factors taken into consideration by the underwriters. The new proposals are likely to take into consideration increased interest rates on the loan plus the proposed new tax changes coming into effect in 2017 reducing the landlord’s profitability. Interest rate affordability stress test: The market is characterised by floating, or relatively short-term fixed mortgage rates usually on an interest only basis. The PRA says that this makes buy-to-let lending particularly sensitive to changes in interest rates and proposes measures to assess the investor’s ability to cope with rising interest rates. They propose lenders should consider interest rates over a minimum 5 year period from the commencement of the new loan. Carry out a “stress test” based on market conditions plus interest rate increases and the ability of the borrower to cope with the changes.
