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New stress test for landlords

25 April 2016 / By: / Under: Landlords

More than 33% of landlords have received calls from tenants in the middle of the night about issues such as unblocking drains and replacing keys that have gone missing. 

New stress test for landlordsThe findings from a survey of 500 landlords also reveals that 10% have developed anxiety issues as a result of their tenants’ behaviour.

The threat of more stress looms on the horizon for landlords who use a mortgage to fund their rental property purchase.

Buy-to-let investors face tougher mortgage affordability tests under new rules put forward by the Bank of England.

At a time when demand for rental properties within the M25 far outstrips their supply, BoE deputy governor Andrew Bailey says plans unveiled by the Prudential Regulation Authority could reduce lending to landlords by up to 20% over the next three years.

Most buy-to-let mortgage decisions made by lenders are currently based on assessments comparing repayments against future rental income.

However, the PRA – the body formed by the BoE to take responsibility for the regulation and supervision of banks and building societies – recommends lenders take account of:

  • All the costs a landlord faces when renting out a property, including letting agent fees.
  • Any tax liability associated with the rental property.
  • A buy-to-let investor’s personal tax liabilities, essential expenditure and living costs.
  • A landlord’s additional income if it is used to support the mortgage repayments. This income should be verified.

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, also wants buy-to-let lenders to apply a stress test to gauge the affordability of a buy-to-let mortgage should interest rates rise.

It says lenders should consider: 

  • Potential rate rises over a five-year period from the start of a buy-to-let mortgage; and
  • Whether a landlord could afford repayments in the event of a 2% rise in interest rates.

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 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 not “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 CP11_16@bankofengland.co.uk by 29 June. 

As a rent guarantee specialist, Assetgrove can take the stress out of being a landlord.  Imagine a world with no voids, no late night calls from tenants and no dealing with viewings or lettings.

Assetgrove’s Guaranteed Rent Scheme takes care of everything, and we provide you with a fixed guaranteed rental income for up to five years. This means you can get on enjoying your life, leaving us to look after your property as if it were our own.

To learn more about all the services that Assetgrove offers landlords, contact us today.

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