New mortgage stress test for buy-to-let investors

Written on 25 April 2016 by Alistair Boscawen in Property News


Property investors will have to pass tougher mortgage affordability tests under new rules being proposed by the Bank of England. 

New mortgage stress test for buy-to-let investorsAt a time when demand for rental properties in Belgravia and other areas of prime central London far outstrips their supply, BoE deputy governor Andrew Bailey says plans unveiled by the Prudential Regulation Authority could reduce lending to buy-to-let investors by up to 20% over the next three years.

Most buy-to-let mortgage decisions made by lenders are currently based on assessments comparing repayments against future rental income.

However, the PRA – the body formed by the BoE to take responsibility for the regulation and supervision of banks and building societies – recommends lenders take account of:

  • All the costs a landlord faces when renting out a property, including letting agent fees.
  • Any tax liability associated with the rental property.
  • A buy-to-let investor’s personal tax liabilities, essential expenditure and living costs.
  • A landlord’s additional income if it is used to support the mortgage repayments. This income should be verified.

These proposals are similar to the stringent affordability assessments that have applied for residential mortgages in the UK since 2014.

Stress test

The PRA, which was established following the abolition of the Financial Services Authority, also wants buy-to-let lenders to apply a stress test to gauge the affordability of a buy-to-let mortgage should interest rates rise.

It says banks and building societies should consider: 

  • Potential rate rises over a five-year period from the start of a buy-to-let mortgage; and
  • Whether a landlord could afford repayments in the event of a 2% rise in interest rates.

The consultation document adds that even if the “borrower’s interest rate will be less than 5.5% during the first five years of the buy-to-let mortgage contract, the lender should assume a minimum borrower interest rate of 5.5%”.

And landlords with four or more investment properties will be subject to even stricter assessment.

The PRA says it “expects banks and building societies base their lending to portfolio landlords according to a specialist underwriting process that accounts for the complex nature of the borrower and their portfolio of properties”.

The authority assessed 31 major lenders in the industry and found 75% already meet its new standards

However, five out of 20 lenders use a stressed rate of 5.47% or lower. The PRA states that lenders should not “base their assessment of affordability on the equity in the property that is used as security or take account of a future increase in property prices”.

This latest blow to landlords, which could come into force after the public consultation ends on 29 June, follows government attempts to squeeze more money out of property investors.

These include a 3% hike in stamp duty that purchasers of second homes have had to pay from 1 April and new rules to be phased in next year that limit the amount of mortgage interest relief available to buy-to-let borrowers.

But the PRA’s recommendations could be worse. When measured against mortgage market share, buy-to-let lending is close to its 2007 peak and the BoE could have placed caps on loan-to-value ratios. Instead, it has reached for one of the smallest tools in its new kit bag.

Best Gapp would advise any investor wanting to purchase a buy-to-let property in Belgravia, Knightsbridge, Chelsea, Mayfair or the surrounding area to get their mortgage agreed in principle before the PRA’s consultation period closes on Wednesday 29 June.

We anticipate that the PRA’s proposals could create another rush to purchase buy-to-let properties similar to the one estate agents experienced in the weeks running up to 1 April when the stamp duty paid on investment properties rose by 3%.

If you own a home in prime central London and want to discover how much it could be worth to a buy-to-let investor, contact Best Gapp’s experienced and knowledgeable sales valuation team today.

Best Gapp is committed to achieving the best price for your central London property and has a proud record of selling homes for values higher than previously seen in a long list of streets.

Responses to the PRA’s consultation should be sent to CP11_16@bankofengland.co.uk by 29 June. The full document can be read here.

Alistair Boscawen

Alistair has 32 years’ experience as an estate agent, starting in the country house department of one of London’s main international agencies before moving to the Knightsbridge house department of the same agency and learning the difference in values between freehold, long lease and short lease houses in Knightsbridge, Belgravia, Chelsea and Mayfair.

All articles by Alistair Boscawen

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