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Landlords to face tougher mortgage affordability tests

29/03/2016

The Bank of England will try to cool the UK housing market by introducing tougher borrowing standards for buy-to-let investors, with the Bank hoping that this will prevent the market from overheating.

The Prudential Regulation Authority (PRA) which regulates the mortgage market, said that action is required in order to ensure that underwriting standards from lenders do not slip, as they expect to substantially grow the number of buy-to-let investors on their books.

Buy-to-let lending has increased ahead of the normal market rate in recent months with the 3 per cent stamp duty increase looming, but the PRA indicated that lenders expect a further 20 per cent growth in the market over the two to three years, even after the higher rate of tax is put in place.

To counter this, the PRA will require lenders to set a minimum borrower interest rate of 5.5 per cent over a minimum period of five years in order to assess affordability. The PRA has predicted that this could reduce the number of approvals by between 10 and 20 per cent.

The PRA said that three quarters of buy-to-let mortgage lenders already met the standards, but that five of the 20 largest mortgage lenders under the supervision of the PRA are currently using a stressed interest rate of 5.47 per cent or lower and as such would not meet the new standards.

The Bank’s financial policy committee (FPC) currently has buy-to-let lending as one of the lead risks to the domestic financial system, only behind the referendum of Britain’s potential exit from the European Union.

The FPC also cited growing household debt as a risk, and mentioned that domestic factors coupled with wider European uncertainty could cause the destabilisation of the financial system. The committee, said: “The FPC judges that the outlook for financial stability in the United Kingdom had deteriorated since it last meeting 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”.

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