Changes to mortgage interest tax relief may affect the affordability of Buy To Let mortgages in the future, but few lenders have been taking this in to account. Regulators are now considering changing the stress test calculations to improve the rigour of bank’s lending on rental properties.
The Prudential Regulation Authority (PRA), which is the regulation and supervisory arm of the Bank of England and which most mortgage lenders fall under, has decided that it’s time stress tests changed. Part of the reason for this is good news for landlords – the Buy To Let sector has been growing rapidly compared to the standard residential sector and it plans to do so by a further 20% per anum going forward. So what does this mean to the average landlord?
The PRA’s March consultation paper from the PRA (a thrilling 17 page read on ‘Underwriting standards for buy to let mortgage contracts’) has outlined some new minimum expectations for Buy to Let mortgages. Affordability criteria will have to take into account the costs of letting a property – including tax liabilities. If borrower’s personal income is being used to support mortgage payments this has to be verified. Affordability must be stress tested against a minimum stressed interest rates. Finally, portfolio landlords with four or more properties on Buy to Let mortgages will have to undergo a specialist underwriting process.
Six months ago the stress test widely used was rental income to be 125% of repayments at a 5% interest rate. Now it is more like 145% and 5.5%. That’s a potential reduction of £41,000 in what you can borrow with a £12,000 annual rental income.
At the end of the day these are all extremely reasonable and prudent measures. No one wants to see landlords struggling to pay their mortgages. Thankfully there are some great investment properties on the market in Plymouth, making it a fantastic destination for landlords looking to expand their portfolios. Reasonable prices and a strong rental sector are likely to remain real attractions in a post Brexit Plymouth, whatever that may look like.
At Martin & Co we very much pride ourselves on taking the time to have these honest and detailed discussions. We will always provide whole of market investment advice, not just sign-post to what we have available on our books at the time.