11 Apr 2016
Author: Stephen Breen
Since the mortgage market review, regular home buyers have been subject to strict affordability tests that include the requirement to prove every penny of income and answer probing questions on spending habits. Buy-to-let landlords have, so far, avoided these tests, with affordability based on rental income instead.
However, the Bank of England has said that the application process for these borrowers should be far stricter than it is now. Rather than simply looking at rental income, the Bank would like lenders to consider the borrower’s own financial circumstances as well. Should such rules be adopted, it is thought that lending to landlords could be reduced by as much as 20% over the coming three years.
The Prudential Regulation Authority (PRA), the division of the Bank responsible for regulating and supervising banks, building societies and the like, has suggested that lenders take into account:
- The costs landlords might have to pay when letting a property.
- Potential tax liability relating to the property.
- The landlord’s own expenditure, living costs and tax liabilities.
- The landlord’s other income where it is used to support the borrowing, which should be verified.
The Authority has also suggested buy-to-let landlords should be subject to more rigorous interest-rate stress tests similar to the ones applied to regular borrowers. These would calculate if the borrower would be able to afford payments, based on potential rises of up to 2% in the interest rate over a period of five years from taking the loan.
According to the PRA, 75% of lenders are already applying these criteria to buy-to-let applications – but the remaining 25%, which includes some major lenders, are not. Applying these new standards could reduce inappropriate lending and the likelihood of excessive credit losses. The PRA is holding a consultation on the proposals which will last until 29 June 2016.
The suggestion that more rigorous tests should be applied for buy-to-let mortgages is just one in a series of changes that target buy-to-let landlords.
Other changes include a rise of 3% on stamp duty on the purchase of a second property which came into play at the start of April. Landlords also face harsher rules on tax relief from April 2017 when higher rate tax relief on mortgage interest payments will be phased out and wear and tear allowances cut. In addition George Osborne announced in his Autumn statement that from 2019 landlords selling off property will have to pay any Capital Gains Tax within 30 days rather than settling at the end of the tax year.
If you are a buy-to-let landlord who would like advice on the recent and forthcoming changes that affect the buy-to-let market, get in touch with our property team.