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PRA proposes tougher mortgage affordability tests for new buy to let landlords


New UK buy-to-let landlords would be subject to tougher mortgage affordability tests under plans put forward for consultation by financial regulators, particularly those that already own multiple mortgaged properties.

The proposals, which are set out in a Prudential Regulation Authority (PRA) consultation paper (17-page / 535KB PDF), are intended to "curtail inappropriate lending" by banks and reduce the risk of credit losses. They follow a PRA review of the buy-to-let lending market, which found the risk of firms relaxing their underwriting standards on buy-to-let mortgages.

The consultation closes on 29 June 2016. The PRA's proposals would apply regardless of whether the landlord was an individual or a limited company, but only if the lender was a PRA-regulated firm. However, smaller firms which are not regulated by the PRA only account for "a small share of the buy-to-let market", and the regulator intends to monitor the market to ensure its rules remain appropriate, according to the consultation paper.

The PRA has proposed a set of standard variables that affected lenders would be required to take into account when establishing the affordability of a particular buy-to-let mortgage. These would include any costs to the landlord associated with renting out the property, any tax liabilities associated with the property and the borrower's own tax, credit commitments and living costs if personal income is being used to support the borrowing.

Lenders would also be required to 'stress test' the impact of an increase in interest rates on affordability, with reference to a minimum increase of two percentage points over five years from the expected start date. If the borrower's interest rate would be less than 5.5% even taking this increase into account, then the firm should assume a minimum borrower interest rate of 5.5% as part of this assessment, according to the proposals.

The PRA would also expect firms to adopt specific risk management systems and controls in relation to their buy-to-let lending, according to the consultation. It is also consulting on a standard definition of 'portfolio landlords', who would be subject to "a specialist underwriting process", as part of the general consultation process. Its proposal is that a landlord with four or more buy-to-let properties mortgaged with any lender be considered a portfolio landlord.

The proposals could reduce the number of new approvals for buy-to-let mortgages by between 10% and 20% by mid-2018, according to the PRA. This would be over and above any impact on the market as a result of recently-announced tax changes, including the additional 3% stamp duty land tax (SDLT) charge that will be imposed on purchases of buy to let properties from 1 April, the regulator said.

Financial services regulation expert Chris Davidson of Pinsent Masons, the law firm behind Out-Law.com, said that the proposals were likely to have a "considerable impact on the market".

"It is helpful that the PRA has not proposed to impose the new requirements on remortgages, to help reduce the shock for existing buy-to-let borrowers," she said. "In practice, a similar affordability assessment will need to be carried out for business buy-to-let mortgages as for consumer buy-to-let borrowers."

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