The Prudential Regulation Authority has announced tough new rules for buy-to-let borrowers.
Among the rules announced today is a minimum affordability stress test rate for borrowers - the outside amount they would need to be able to pay - of 5.5 per cent for the first five years of the mortgage.
The rules follow concerns at the PRA about lenders’ growth plans, and the fact they might relax their underwriting standards to meet them.
When assessing a borrower’s affordability, the PRA said a lender can take into account rental increases but said these should not exceed the government’s inflation target of 2 per cent.
The PRA has also said that when assessing their minimum interest coverage ratio, lenders should take into account rental demand and rent levels in the property’s area, taking into account any tax liability associated with the property including mortgage interest tax relief.
Earlier this month the Financial Conduct Authority's mortgage sector manager Lynda Blackwell also expressed concerns about the future growth of the mortgage market, warning some lenders might lower their standards.
Bob Young, chief executive of Fleet Mortgages, said the announcements should not come as a surprise given the PRA’s consultation earlier this year.
He said: “Lenders have already been moving in a number of areas since its initial publication and we can expect those who do not meet these standards to have to move further, and relatively quickly, in the case of interest cover ratio and stress test changes which need to be implemented by the start of next year – the market norm is likely to be circa-5.5 per cent at 145 per cent.
“The PRA have allowed five-year fixes to remain outside these standards but I suspect if there’s a spike in five-year activity, they’ll move to include it.”
Increasing numbers of lenders have been demanding rental coverage of 145 per cent in recent months.
The PRA has said the industry standard remains 125 per cent and it does not expect its proposals to reduce this threshold, saying it was more likely that it would go up.
It has also told firms to put in place different policies for lending to portfolio landlords, since this can be “inherently more complex” than lending to someone with with a small number of properties.
Portfolio landlords are defined as those with four or more distinct mortgaged buy-to-let properties.
The new rules on affordability stress tests and ICR tests will come into effect on 1 January 2017 while the other rules on 30 September 2017.
Peter Williams, executive director of the Intermediary Mortgage Lenders Association, said: “We are encouraged that the new standards are to be implemented in a sensibly phased way over the course of the next year.
“In the interests of a stable market for buy-to-let mortgages and housing overall, this 12 month window should now be allowed to unfold free from additional change and upheaval.
“The use of a borrower minimum interest rate of 5.5 per cent will remain a source of tension, not least if interest rates fall again.”
