Bank of England sets January deadline for tougher rules on buy-to-let mortgages
Last March, the Bank of England began a consultation process surrounding buy-to-let mortgages. Now, the Bank has set out a timetable for lenders to toughen up their criteria, with a 1 January 2017 deadline.
Lenders will be required to tighten their lending rules, meaning it may become more difficult to get a buy-to-let mortgage. Following a six-month consultation, the Prudential Regulation Authority (PRA) has set out a timetable for lenders to tighten up their buy-to-let mortgage rules by 1 January 2017.
Under the tougher rules, landlords will be required to have higher levels of rent relative to their mortgage payments. From the New Year, lenders must require borrowers to receive a minimum of 125% of their mortgage costs in rental income. Lenders will also have to 'stress-test' all new mortgages at a rate of 5.5%, even though actual rates are much lower.
Landlords with four or more properties will also be asked to provide more information about their income and debts. However, in a positive change for landlords, lenders will be now able to factor in a rent increase of up to 2% a year when deciding whether a borrower can afford a buy-to-let mortgage.
The Daily Telegraph reports that the new rules come ahead of changes to tax on landlords' income which come into force in April next year. These changes will remove the ability of landlords who pay higher or additional rate tax to deduct their mortgage interest from their rental income before calculating their tax bill.
The new PRA rules say that lenders must take into account a borrower's future tax liabilities, including the changes to mortgage interest relief.
Mortgage expert David Whittaker told the Telegraph that most lenders will probably increase their rental income requirement to 140% or 145% of the rental income. He said: "The report says that some of the factors involved - such as the tax changes - may lead to higher minimum thresholds. The PRA is saying to lenders that it needs them to move away from 125% towards something that’s more meaningful."
Most lenders already apply at least a 125% rental income cover and many larger lenders, including Barclays and Nationwide, have already raised their rental cover requirements.
Whittaker added that the administrative costs of the changes could push up mortgage rates in the long run. He said: "Increased complexity carries cost for someone. At some point, that cost will have to be borne. The real cost of mortgages – competitive pressures notwithstanding – might start to increase."