03 October 2016
The Prudential Regulation Authority (PRA) have agreed on a phased implementation process for the new BTL affordability assessment.
In their supervisory statement issued this week, lenders will be required to implement the changes to interest coverage ratio tests and interest rate stress tests by 01 January 2017, with the remainder of the required changes by 30 September 2017.
All lenders will be required to use an interest coverage ratio and/or an income affordability test (taking into account the borrowers personal income to support the mortgage payment, Wealth can also be included as a measure in this) when assessing a buy to let application.
Borrower costs that will be taken into account by lenders include: management and letting fees, council tax, service charge, insurance, repairs, voids, utilities, gas and electrical certificates, licence fee, ground rent and any other costs associated with renting out the property.
A minimum borrower interest rate of 5.5% must be used during the first five years of the buy to let mortgage.
Pound-for-pound remortgaging landlords will not be subject to the rules. There are also some other exclusions including Consumer Buy to Let, Buy to Let mortgage contracts with less than 12 months and consent to let where an owner occupier on a residential mortgage applies to let their property temporarily.
Portfolio Landlords with 4 or more mortgages buy to let properties will be subject to specialist underwriting standards.
Lenders are prevented from using the SME supporting factor when conducting buy-to-let business.
Some lenders have already made changes to their BTL calculations. To help you understand what lenders are currently offering we have produced a
Matrix which will be updated over the coming months. So what does this actually mean to your BTL customers?
Take a look at the example below.
Based on the National Average BTL Loan Size of £150K (CML Jul16) How to work out the amount of Rental income that is required:
Loan amount (£) /12 x min borrower interest rate (%) x min ICR threshold (%)
E.g. £150,000/12 = £12,500 x 5% = £625.00 x 125% = £781.25 monthly rental required
The table below shows the difference in the monthly rental income required, applying the increased interest cover.
|Loan Amount||Min Borrower Interest Rate||Min ICR Threshold||Monthly Rental Income required|
The above example does not include additional personal income.
Although the rental income should exceed the monthly interest only mortgage payments there are obviously going to be further costs over and above the deposit required such as maintenance, insurance, void periods, letting costs etc.