Were your aware that 10% of landlords have developed anxiety issues because of their tenants’ behaviour? And over 33% of landlords have received late-night phone calls about mislaid keys, blocked drains and power cuts.
And now the Bank of England is threatening to pile more stress on buy-to-let investors who fund their property purchase with a mortgage.
Landlords face ultra-strict mortgage affordability tests under new rules put forward by the Prudential Regulation Authority – the body formed by the BoE to take responsibility for the regulation and supervision of banks and building societies
At a time when demand for rental properties in every part of London far outstrips their supply, BoE deputy governor Andrew Bailey says the PRA’s plans could reduce lending to landlords by up to 20% over the next three years.
Most BTL mortgage approvals are currently based on assessments comparing repayments against future rental income.
But the PRA’s consultation document recommends lenders take account of:
- All the costs a landlord faces when renting out a property, including management fees.
- All tax liabilities associated with the rental property.
- BTL investors’ personal tax liabilities, essential expenditure and living costs.
- A landlord’s additional verified income if it is used to support the repayments on a BTL property loan.
These proposals are similar to the stringent affordability assessments that have applied for residential mortgages since 2014.
Stress test
The PRA, which was established following the abolition of the Financial Services Authority, is also recommending lenders apply a stress test to gauge the affordability of a BTL mortgage should interest rates rise.
It says lenders should consider:
- Potential rate rises over the first five-years of a BTL mortgage; and
- If a landlord could afford repayments in the event of interest rates going up 2%.
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 buy-to-let mortgage contract, the lender should assume a minimum borrower interest rate of 5.5%”.
And landlords with four or more investment properties will be subject to even stricter 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 no longer “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 landlords’ profits.
These include a 3% hike in stamp duty that purchasers of second homes have had to pay from 1 April and new rules to be phased in next year that limit the amount of mortgage interest relief available to buy-to-let borrowers.
Full details of the PRA’s proposals can be read here. Responses to the consultation should be sent to [email protected] by 29 June.
The good news is the PRA’s proposals could have been worse. When measured against mortgage market share, BTL lending is close to its 2007 peak and the BoE could have placed a tight cap on loan-to-value ratios. Instead, it has reached for one of the smallest tools in its kit bag.
Even better news, if you are a landlord in London, is the fact that Denhan International can take the stress invariably associated with the running a rental property and make it disappear.
Late night phone calls from tenants, meetings to deal with viewings and problems such as voids all become things of the past when you sign up to Denhan International’s Guaranteed Rent Scheme. Not only do we deal with every aspect of running your rental property, we guarantee a fixed rental income for a period of up to five years.
We look after the property as if it were one of ours, you get to relax and enjoy the rest of your life while receiving a steady rental income. To learn more about this and all the other services on offer from Denhan International, contact us today.