The Bank of England watchdog, the Prudential Regulation Authority are introducing new lending rules from January 2017 which may make it much more difficult to obtain a loan for buy to let properties.
When applying for loans, Landlords must prove that the rent and their other income will be sufficient to meet the mortgage payments. Landlords are also subject to a ‘stress test’ which requires the landlord to prove that in the event of an increase in the loan interest, they could continue to pay all that is due. That calculation will allow for increased rent but not for increased property value so the income will need to be sufficient to meet the mortgage payments both at the time and in the future. This calculation will also have to include the effects of the reduction in mortgage interest relief which is being phased in over the next 3 years.
The new rules are not aimed so much at making the ‘stress test’ more difficult. Many lenders are already conducing these but the intention is to ensure that there is no relaxation of requirements. There is also a warning in the rules regarding landlords with four or more properties, so called portfolio landlords, who will need to meet more stringent requirements.
The FCA is also considering a similar set of rules relating to those smaller lenders who are not subject to PRA regulation.
The new rules may not have a substantial effect as many lenders will already be complying with them. However, some more marginal lenders may tighten their requirements and landlords seeking to borrow against groups of properties may find lending criteria harder to meet. The new rules are to be phased in and so careful consideration should be given from the start of 2017. The new rules will also apply to re-mortgages and so lending obtained under old criteria may be difficult to re-finance.