Affordability Tests to ‘Damage’ Buy to Let Growth

More headline grabbing nonsense, but read on! The good bits are nicely hidden. We have highlighted the core information that contradicts the headlines that appear incredibly negative when the actual forecasts are very positive.

Buy-to-let landlords should face new limits on the amount they can borrow, the Bank of England has proposed.

It suggested that lenders should be much stricter when deciding whether or not to grant landlords a mortgage.

Instead of just taking their rental income into account, the Bank wants lenders to look at their wider financial situation as well.

If adopted, the new rules could reduce lending to landlords by up to 20% over the next three years.

The Prudential Regulation Authority (PRA) – an arm of the Bank – has recommended that banks and building societies take account of:

  • all the costs a landlord might have to pay when renting out a property
  • any tax liability associated with the property
  • a landlord’s personal tax liabilities, “essential expenditure” and living costs.
  • a landlord’s additional income – where this is being used to support the borrowing. This income should be “verified”.

Future Growth: The PRA said the new standards would “curtail inappropriate lending, and the potential for excessive credit losses.”

The PRA has also suggested that lenders should apply a stricter interest rate “stress test”, to measure affordability in the event of a rise in interest rates.

It said lenders should look at potential rate rises over a five year period from the start of a mortgage. They should also consider whether a landlord could afford repayments in the event of a 2% rise in interest rates.

The PRA said that 75% of lenders already meet these stricter criteria. 

Before the PRA announcement lenders had expected the buy-to-let market to expand by 20% a year over the next few years, in spite of the tax changes. If the measures are adopted, the PRA believes such growth will slow to 17% a year.

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