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Help Landlords to Remortgage Now Before Affordability Models Tighten

Posted: 11/10/2016

More changes to buy-to-let regulations are on their way. Help landlords to remortgage now before tighter affordability rules are enforced on the 1st January 2017.

The Prudential Regulation Authority (PRA) announced on the 29th September 2016 its expectations of lenders’ underwriting standards to apply to the buy-to-let market, following a review of the market in 2015/2016.

What these changes mean to you and your clients:

Affordability Testing
• Affordability testing will become mandatory; using an interest coverage ratio (ICR) test and/ or an income affordability test.
• Affordability assessments should take into account: borrower’s costs including tax liabilities, verified personal income (where used by the lender) and possible future interest rate increases.
• If non-rental/ personal income is used, lenders will be expected to conduct a detailed affordability assessment of the borrower taking into account income and expenditure, credit commitments, essential living costs and other commitments.
• The PRA wishes to clarify that the provision in Capital Requirements Regulation (CRR) which reduces the capital requirements on loans to small and medium-sized enterprises by around 25% should not be applied where the purpose of the borrowing is to support buy-to-let business.

Interest Rate Stress Testing
• Lenders will take future interest rates over the next 5 years into consideration to ensure sustainable affordability testing, unless the mortgage is fixed for 5 years.
• The minimum interest rate used in the stress and affordability tests should be 5.5% or a 2% increase above the current buy-to-let rate, whichever is higher.

Things to consider
• The PRA’s consultation paper issued on the 29th March 2016 clarifies that the changes announced in the supervisory statement, will exclude landlords remortgaging (and not increasing borrowing) in a similar way to residential lending.
• Lending to portfolio landlords (defined by the PRA as being those with four or more mortgaged buy-to-let properties) should be assessed using a specialist underwriting process.

Example Case
A landlord currently receiving a rental income of £900 per month can apply for a loan of up to £233,000. Following the implementation of the new interest and affordability stress testing rules on the 1st January 2017, the loan amount they will be able to apply for will be reduced to £160,000. That’s a £73,000 reduction!

Ingard’s View

Our advice to those brokers with landlords whose buy-to-let mortgages are due to expire in the next 6 months, is to contact them now to secure a competitively priced product.

Contact our Specialist Team for guidance on the best rates and criteria available:

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References
http://www.bankofengland.co.uk/publications/Pages/news/2016/073.aspx
http://www.aldermore.co.uk/media/3601/aldermore-btl-affordability-guide.pdf