Bank of England to force buy-to-let landlords to face stricter affordability tests

Updated on 31 March 2016 | 12 Comments

Further action could be taken to cool the buy-to-let market.

Buy-to-let landlords could face stricter lending criteria in the future, as the Bank of England wants to bring in new affordability tests.

The Bank said it wants lenders to be much stricter when deciding whether or not to approve mortgage applications.

This week it warned that around a quarter of lenders are applying “less rigorous” underwriting standards as they try to grab market share in the fast-growing buy-to-let sector.

In order to curtail lax lending practices, the Bank of England has proposed making lenders look at a landlord’s wider financial situation, not just the potential rental income when assessing their application.

New lending criteria

The Prudential Regulation Authority (PRA) – a part of the Bank – has recommended that lenders should take the following into account in order to “curtail inappropriate lending, and the potential for excessive credit losses”:

  1. All the costs associated with renting out a property
  2. Any tax bills associated with the property
  3. A landlord’s own personal tax liabilities, spending and living costs
  4. Any additional income the landlord has.

As well as the new affordability criteria the PRA wants banks and building societies to apply a stricter ‘stress test’ to potential borrowers. This is where the lender looks at whether the landlord could still afford the mortgage even if interest rates were to rise. 

Under the new rules landlords might have to prove they could still afford their repayments if there was a 2% rise in interest rates.

Boost safe lending

The proposed changes aren’t designed to restrain growth in the buy-to-let sector, but ensure safe lending, says the Bank of England. There are fears that if there is an economic downturn buy-to-let investors could sell en mass and destabilise the market.

It’s believed that 75% of lenders already meet the affordability and stress test criteria the PRA wants to introduce. It is the new ‘challenger’ banks that could be hit hard, as they are still trying to get a foothold in the market.

The proposed changes have been criticised by property groups. Many believe the new tax rules, that come into effect for landlords from next week, are more than enough to restrain the market.

“This is a classic case of slamming the stable door after the horse has bolted,” Jeremy Leaf, a former chairman of the Royal Institution of Chartered Surveyors, told the BBC. “The changes the Chancellor has made to mortgage interest tax relief and higher Stamp Duty for landlords will have enough of an impact on buy-to-let without the need for further interference from the Bank of England.”

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