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Buy-to-let landlords face tougher borrowing standards

The Bank of England is set to impose tougher borrowing standards on buy to let landlords. Announced on Tuesday 29 March 2016, the Prudential Regulation Authority’s (PRA) new draft proposals cover minimum standards that firms should meet when underwriting buy-to-let mortgage contracts – Underwriting standards for buy-to-let mortgage contracts.

The new standards for buy-to-let landlords

The Prudential Regulation Authority set out new minimum standards on Tuesday that instruct lenders to take into account all costs that landlords might have to pay when renting out a property, including tax payments.2015-07-28 16.25.12

It has recommended that banks and building societies take account of the following:

  • all the costs a landlord might have to pay when renting out a property
  • any tax liability associated with the property
  • a landlord’s personal tax liabilities, “essential expenditure” and living costs.
  • a landlord’s additional income – where this is being used to support the borrowing. This income should be “verified”.

Andrew Bailey, the Bank’s deputy governor and chief executive of the PRA, said the move was designed to curb a potential rise in risky lending.

The PRA said lenders expected to grow their buy-to-let lending books substantially over the next few years.

Its research showed that lenders expect 20pc annual growth in gross buy-to-let lending over the next two to three years, even taking into account recent tax changes introduced by George Osborne, the Chancellor.

This includes a 3pc increase in stamp duty for landlords and second homeowners next month. The PRA will require lenders to set a minimum borrower interest rate of 5.5pc over a minimum period of five years when assessing affordability.

The move is expected to reduce buy-to-let approvals by between 10pc and 20pc over the next two to three years relative to how they would have grown. The total stock of buy-to-let loans has increased by around 40pc since the crisis, compared with around 2pc for the owner-occupied market.

At this stage these are draft proposals and the consultation closes on Wednesday 29 June 2016.

The full document can be downloaded here: Underwriting standards for buy-to-let mortgage contracts – CP11/16 – and comments can be sent to this email address: [email protected]

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Further reading

Buy-to-let landlords should face new affordability tests, Bank says

Buy to let landlords face tougher borrowing standards

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