New stress test for landlords in Brixton and Battersea

Both our Battersea & Brixton offices have benefitted from growth in the buy-to-let (BTL) market, with many investors finding properties through us and then renting them out with Eden Harper. However, times ahead may be more challenging for the BTL Investor.

Property investors will have to pass tougher mortgage affordability tests under new regulations put forward by the Bank of England.

BoE deputy governor Andrew Bailey says plans unveiled by the Prudential Regulation Authority could reduce lending to buy-to-let investors by up to 20% over the next three years.

The majority of BTL mortgage approvals are currently based on assessments comparing repayments against future rental income. 

However, the PRA – the body formed by the BoE to take responsibility for the regulation and supervision of banks and building societies – wants lenders to take account of:

• All the costs a landlord faces when renting out a property, including the fees charged by letting agents.
• Any tax liability associated with the rental property.
• A BTL investor’s personal tax liabilities, essential expenditure and living costs.
• A landlord's additional income if it is used to support the mortgage repayments. This income should be verified.

These proposed rules are similar to the stringent affordability assessments that have applied to the residential mortgage market since 2014.

Stress test

The PRA, which was established following the abolition of the Financial Services Authority, also wants BTL lenders to apply a stress test to gauge the affordability of a buy-to-let mortgage should interest rates rise.  
It says property finance providers should consider:

• Potential interest rate rises over a five-year period from the start of a BTL mortgage; and
• Whether a landlord could afford repayments in the event of a 2% rise in interest rates.

The consultation document adds that even if the “borrower’s interest rate will be less than 5.5% during the first five years of the BTL mortgage, lenders should assume a minimum borrower interest rate of 5.5%”.

And landlords with four or more investment properties will be subject to a stricter affordability assessment.
The PRA says it “expects banks and building societies to base their lending to portfolio landlords according to a specialist underwriting process that accounts for the complex nature of the borrower and their portfolio of properties”. 

The authority assessed 31 major lenders in the industry and found 75% already meet its new standards.

However, five out of 20 lenders use a stressed rate of 5.47% or lower. The PRA states that lenders should not “base their assessment of affordability on the equity in the property that is used as security or take account of a future increase in property prices”.

This latest blow to landlords, which could come into force after the public consultation ends on 29 June, follows government attempts to squeeze more money out of property investors.

These include a 3% hike in stamp duty that purchasers of second homes have had to pay from 1 April this year and new rules to be phased in next year that limit the amount of mortgage interest relief available to buy-to-let borrowers.

But the PRA’s recommendations could be worse. When measured against mortgage market share, BTL lending is close to its 2007 peak and the BoE could have capped loan-to-value ratios. Instead, it has reached for one of the smallest implements in its tool box. 

Eden Harper would advise any investor wanting to purchase a BTL property in Battersea or Brixton to get their mortgage agreed in principle before the PRA’s consultation period closes on Wednesday 29 June.

We anticipate that the PRA’s proposals could create another rush to purchase BTL properties similar to the one estate agents experienced in the weeks running up to 1 April when the stamp duty paid on investment properties jumped by 3%. If you are considering a BTL investment and wish to discuss it in more detail please do not hesitate to contact us to run through the calculations.

If you already own a home in Battersea or Brixton and want to discover how much it could be worth to a BTL investor, then contact Richard Symes at our Battersea office or Richard Sullivan in our Brixton office to arrange a free, no obligation market appraisal. 

☻Responses to the PRA’s consultation should be sent to CP11_16@bankofengland.co.uk by 29 June. The full document can be read here.