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What do the Buy-to-let changes mean to me? - news article image

What do the Buy-to-let changes mean to me?

10 Jan 2017

2 minute read

Q: I am a landlord and I have heard that Buy-to-let lending rules are tightening from the 1st January 2017, what does this mean to me?

A: Ahead of the changes to tax relief on mortgage interest, which are being phased in from April 2017 through to April 2020, the Prudential Regulation Authority (“PRA”), part of the Bank of England, is changing the rules of lending which will effectively reduce the maximum loans available to landlords.

The PRA have set guidelines which involve increasing the assumptions used when “stress testing”. Currently, when looking at the maximum that they will lend, a lender will undertake a pay rate calculation or stress test. Typically this requires the likely rent to exceed 125% of the interest payments due, using what they consider to be a reasonable interest rate – so not necessarily the interest rate you will be paying.

Restricting the ability to offset mortgage interest against the rental received will mean that you should expect to pay more tax on your rental income and therefore the net income that you receive will be lower. The PRA has therefore told lenders, in simple terms, to increase the rental coverage in their stress test to 145% of mortgage payments and introduce a minimum interest rate for the test of 5.5%. This means that the maximum that can be borrowed to purchase a rental property will be less than it was before.

In addition, if you have four or more mortgaged properties you will be classed as a Portfolio Landlord, complicating this affordability check further. Lenders will have to make a more detailed assessment of your personal position when looking at what they can lend you and what you can realistically afford to repay.

Athough these changes are set to take place from 1st January 2017, very few lenders to date have confirmed what action they will take, making it difficult to make decisions now about potential purchases in the New Year. Some lenders for example, are indicating that they will apply the old percentage rules for basic rate tax payers, but at the higher 5.5% interest rate; whilst others are likely to go beyond the PRA requirements and look for 160% coverage at 5.5% for additional rate tax payers.

So as well as having higher tax liabilities in the future, you are likely to find borrowing more restrictive and approaches to lending more varied.

What do the Buy-to-let changes mean to me? - news article image


Fran Kidd

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