Buy-to-let landlords searching for a buy-to-let mortgage in Britain are set to face more stringent rules from lenders from early next year.
However, this will only be for certain products, it has been confirmed.
The Prudential Regulation Authority has announced that buy-to-let mortgages with terms of less than five years, or fixed rates for five years or more will not be subjected to the stress test.
Acting on a Government plea, the Prudential Regulation Authority undertook a review of the buy-to-let market in Britain. It then set out a timetable for lenders to tighten up their criteria for buy-to-let lending.
Straightforward changes, including stress-tests, must be implemented by New Years Day 2017. The remainder of rules must be in place by 30th September 2017.
This means that buy-to-let lenders will ask investors to have greater levels of rent, relative to their mortgage costs. Lenders will be able to factor in rental rises of up to 2% per annum when deciding if a landlord will be able to afford the cost of a property. This was previously not allowed to be taken into account.
Investors with landlord insurance on a portfolio of four or more homes will be required to disclose more information on their income to the Prudential Regulation Authority. This is to factor in tax on landlords’ income from April 2017, when mortgage interest relief begins to be phased out.
According to the Prudential Regulation Authority, affordability assessments should take into account borrowers’ costs, including tax liabilities, personal income and interest rate increases in the future.
Peter Williams, executive director of Intermediary Mortgage Lenders Association, believes the standards are in line with industry expectations, offering a reasonable way forwards.
Williams said: ‘We are encouraged that the new standards are to be implemented in a sensibly phased way over the course of the next year. In the interests of a stable market for buy to let mortgages and housing overall, this 12 month window should now be allowed to unfold free from additional change and upheaval.’
‘There will be continuing concerns about the level playing field with firms outside of the PRA regime, though that is now clearly on the agenda of both the Financial Conduct Authority and Bank of England. The use of a borrower minimum interest rate of 5.5% will also remain a source of tension, not least if interest rates fall again,’ he continued.
The Council of Mortgage Lenders has moved to welcome the moves. Director General of the firm, Paul Smee, said: ‘the new underwriting requirements broadly reflect existing practice, as the Prudential Regulation Authority says. While the regulator will need to keep the impact of the new requirements under review, we expect the effect to be modest under current market conditions and we do not anticipate the measures resulting in any shock to the market.’