Bank of England: Landlords Should Face Affordability Tests


March 2016

Bank of England: Landlords Should Face Affordability Tests

The Bank of England has said that landlords looking to take out buy-to-let mortgages should be subjected to stricter affordability tests and should have limits set on the amount that they can borrow.

The Bank has said that mortgage providers should take a much stricter approach when considering lending potential landlords money to purchase properties. It has also said that it wants lenders to look at the person’s wider financial situation instead of only considering their potential rent income.

It is believed that the new rules, if introduced, could reduce total landlord lending by around 20% over the course of the next three years.

The Prudential Regulation Authority (PRA), the regulatory arm of the Bank of England, has released a list of factors that should be taken into account by banks and building societies when considering a loan request:

  • 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”.

The Prudential Regulation Authority has said that taking these measures would “curtail inappropriate lending, and the potential for excessive credit losses”.

Back in December, Mark Carney, the governor of the Bank of England, warned that if landlords began to sell off their buy to let properties because of a hike in interest rates, this could lead to an excess of new homes on the market, which could destabilise the economy.

The PRA also recommended that mortgage providers should bring in a new, stricter “stress test” for interest rates, in order to identify how the individual would be able to cope in the event of an interest rates rise.

The regulator said that lenders should examine the impact of potential rate increases over a five year period from the mortgage being taken out. They also said that lenders should look into whether or not the borrower would be able to deal with a 2% increase in rates.

The PRA did say that it believes around 75% of lenders are already acting within these parameters but that there are still some major mortgage providers who are not.

Landlords are already set to face a number of new tax restrictions, designed to prevent an uncontrollable boom in the buy to let market.

As of the 1st of April, buy to let property purchases will face a new 3% stamp duty, 2017 will see landlords’ tax relief on mortgage payments capped at the basic level of 20%, and from 2019 landlords will also be required to pay Capital Gains tax within thirty days, as opposed to waiting for the end of the tax year.

However, the delayed effect of these measures has led to many experts accusing the Bank of acting too late to be able to properly control the booming buy to let market.

Jeremy Leaf, once the chairman of Rics (Royal Institute of Chartered Surveyors), said:

"This is a classic case of slamming the stable door after the horse has bolted,"

"The changes the Chancellor has made to mortgage interest tax relief and higher stamp duty for landlords will have enough of an impact on buy-to-let without the need for further interference from the Bank of England.”

Before this announcement was made by the Prudential Regulation Authority, lenders had been predicting annual growth of 20% in the buy-to-let market over the coming few years, even after the tax changes had been taken into account.

Forecasters have said that if these recommendations are implemented, the annual growth in the market will slow down to 17%. The consultation with the PRA is due to continue until 29 June 2016.

The Financial Policy Committee has repeatedly said that the buy-to-let market poses one of the biggest threats to the UK economy, although they believe that uncertainty over EU membership remains a larger concern.

The committee said last week:

“The FPC judges that the outlook for financial stability in the United Kingdom has deteriorated since it last met in November 2015. Domestic risks have been supplemented by risks around the EU referendum.”

“The FPC remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending.”