The Prudential Regulation Authority (PRA) Consultation on landlord ‘affordability’ management is being implemented as guidance to lenders from the 1st of January.
The PRA are requiring Buy to Let lenders to take into account borrower’s increased tax liabilities due to Section 24 mortgage interest relief reductions and other outgoings when assessing the amount of loan requested.
These changes don’t include limited company lending or like for like remortgages, but will affect all individual Buy to Let purchases and and any remortgage with a capital raising element.
Several lenders have already increased their interest cover ratio from the standard 125% to 145% and the minimum notional rate will be 5.5% unless fixed or capped for 5 or more years.
As an example if you wanted to borrow £100,000 stress tested for affordability at a notional rate of 5.5% and 125% interest cover (the percentage by which the rent has to be more than the interest charged on the loan) then the rental income from the property would have to be a minimum of £572.91 pcm
However if the interest cover figure is increased to 145% then the minimum rental figure required would be £664.58 pcm
From the 1st October 2017 the PRA are also intending to make underwriting applications for ‘Portfolio Landlords’ with 4 or more mortgaged properties much tighter with requirements of proof for true income. This we mean requiring copies of past tax returns, bank statements, rental accounts and SA302s.
Therefore if you are consider a Buy to Let application where the amount of loan required is close to the maximum allowed under current stress testing rules you need to consider getting your applications in now.