The Bank of England Prudential Regulation authority (PRA) issued new underwriting standards for buy-to-let commercial mortgages at the end of September 2016. These will come into effect at the beginning of 2017, but some lenders are already applying them.
The main changes are:
If mortgage payments are to be made through rent, then the rent received should equal 125% of the mortgage repayments. Future rent rises can be taken into account.
If other income sources are to be used to repay the mortgage as well as the rent, then the total should still equal 125% of the repayments.
Lenders need to consider landlords’ tax liabilities when accessing affordability, especially when the mortgage interest tax relief is reduced next year.
When considering affordability, where full or part repayments are made through income other than rent, then the existing liabilities of the borrower needs to be taken into account, such as credit card debts.
For fixed rate mortgages of less than five years, the minimum interest rate will be 2% above the current standard rates, or 5.5% – whichever is the higher. A rate rise of 2% per year can be part of these calculations.
For portfolio landlords with four or more properties, lenders will look at their experience, business plans and cash flow projections.
The changes may make it more difficult for some people to get buy-to-let mortgages, but provided the above criteria is met, borrowers will still be able to obtain commercial mortgages.