Buy To Let Loans have new lending rules since January 2017.
The Prudential Regulation Authority (PRA) introduced them, but they can make it more difficult to get Buy To Let Loans.
Lenders will have to carry out the affordability assessments that will take into account:
- Landlord’s costs including tax liabilities,
- verified personal income
- possible future interest rate increases
This means that the Landlords will be subject to a ‘stress test’ which requires them to prove that if the loan interest increases, they will be capable to continue to pay their monthly instalments.
When setting the expectations for future interest rate increases, the PRA reviewed the standards in the industry. Also, they considered the impact of changes in interest rates, and measured the stressed rate on landlords accordingly.
There is also a warning for the “portfolio landlords”. The PRA defines as “portfolio landlords” the ones with 4+ mortgaged buy-to-let properties. With these changes, they should be assessed using a specialist underwriting process.
The new rules for Buy To Let Loans may not have a substantial effect as many lenders were already complying with them.
However, few more lenders may tighten their requirements. Also, landlords seeking to borrow against groups of properties may find lending criteria harder to meet. These rules will phase in and so you should give careful consideration to them. They also apply to re-mortgage. So, if you obtained lending under old criteria, that may be difficult to refinance.
Lenders must now take every property in landlords portfolio into consideration when they apply for a new mortgage, rather than simply assessing their overall balance sheet.
When landlords apply for additional borrowing, the monthly rental income on each of their properties must cover at least 125% of their mortgage payments, tested at an interest rate of 5.5%.
This calculation is known as the ‘interest cover ratio’. Some lenders have chosen to test affordability at ratios up to 145%, meaning landlords with heavy mortgages or those with low rental yields could struggle to obtain a loan.