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The Prudential Regulation Authority (PRA) have now confirmed to lenders what they expect the minimum standards of Buy to Let underwriting to be.
These standards will have to be in place by 1st January 2017 for rental stress testing and by 30th September for other minimum affordability and risk checks.
The PRA have confirmed the minimum interest rate that new Buy to Let loans must be assessed against for affordability is 5.5% regardless of Bank base rate. The PRA also requires the minimum interest cover percentage to remain at 125%, but that it expects lenders to considering increasing this figure due to having to take into account new risk and cost factors as detailed below:
“When determining the minimum interest cover ratio threshold, consideration should be given to the following costs where the borrower is responsible for payment: 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 irrespective of whether the borrower is an individual or a company
The PRA also expects firms to take into account any tax liability that is associated with the property. For the avoidance of doubt, this should include mortgage interest tax relief. Firms may make a simplifying assumption that all borrowers are subject to higher rate tax but this may result in firms declining otherwise eligible borrowers. Capital gains tax does not need to be included in the assessment of affordability.”
Due to the above increased standards for assessing affordability it has been rumored that lenders may need to increase their interest cover figures from the current norm of 125% to 145%.
Example stress testing under new rules:
For every £1 of monthly rental stress tested at 5.5% and 125% interest cover you can borrow a maximum of £174.55
However if the interest cover figure increases to 145% the amount you can borrow for every £1 of monthly rental drops to £150.47
The Good news for existing borrowers is that the PRA have said:
“To avoid existing borrowers being adversely affected when remortgaging, the expectations do not apply to buy-to-let remortgages where there is no additional borrowing beyond the amount currently outstanding under the existing buy-to-let contract to the firm or to a different firm. In determining the amount of borrowing on the new buy-to-let contract, arrangement fees, professional fees and administration costs can be excluded.”
The PRA have stressed that more care in assessing risk, experience and affordability should be taken in underwriting loans for Portfolio Landlords, which will be defined by Landlords with 4 or more properties.
Holiday lets, bridging loans, property investment lending and corporate lending are all exempt from the new underwriting standards.
Also five year fixed rate product applications will remain outside these standards but if there is a large increase in 5 year fixed rates being taken up then they will likely be included in the future.
Click Here to see the full PRA document for Buy to Let underwriting standards.
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