The Bank of England’s Prudential Regulation Authority (PRA), which monitors banks and lenders, has announced plans to implement stricter limits on buy-to-let borrowing, slamming the brakes on landlord lending and slowing the market.
The consultation paper for the scheme was published this week, with responses due by June 29th.
What’s the situation at the moment?
Currently, landlords are able to apply for a buy to let mortgage with a rental cover for 125% - as long as the rent covers 125% of the mortgage the landlord’s personal finances are not taken into account.
How would it change?
When the changes coming into force, lenders would be forced to examine the costs a landlord would incur over the course of renting the property - including tax liabilities, management costs and agency fees before they approve a mortgage. Income verification would also be required. Details of income, debt, utility bills and even childcare will be taken into account. This is nothing new for landlords who have recently secured already have a mortgage for a residential property – this process is already in place following changes to the residential lending requirements relatively recently.
Landlords will also be subject to ‘stress tests’, checking the borrowing against higher mortgage rates, to ensure that they can afford to keep up repayments would interest rates rise over a five-year period.
Why are they making it so much harder?
The PRA are not concerned with opening the market up for other forms of purchasing (the changes are not being put into place to make the market easier for first time buyers!) instead, the new stricter steps have been designed following fears that landlords could be vulnerable to fluctuations in interest rates and potential instability should there be a drop in house prices.
Although the PRA predict a drop of buy-to-let approvals from 20% to just 10% by July 2018, with the new stricter guidelines, fewer landlords are likely to find themselves in hot water with repaying their mortgage if their income suddenly drops, or there is a hike in interest rates.
What about if I want to remortgage?
If you are looking to remortgage an existing buy-to-let property, the new criteria do not apply unless you are asking to borrow more. That said, when similar changes were made to residential borrowing in 2014, it became much harder for existing borrowers to remortgage.
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