Buy To Let Mortgage Stress Test

Buy To Let Mortgage Stress Test.

The Prudential Regulation Authority (PRA), the regulator that controls the financial strength of Banks (after the credit crunch crisis) and part of the Bank of England, has confirmed that it is to impose new rules on buy to let mortgage lenders to ensure that suitable and affordable mortgages are offered to landlords.

For residential mortgages, there are already measures in place where both mortgage brokers and lenders must ensure that a mortgage is suitable and affordable by conducting "stress tests" by gathering information on both our incomes and all of our expenses to check that we can afford the mortgage payments not just today but also if interest rates increase.

For the current buy to let mortgage market there are two types of lender those that do income versus expenses tests on you personally and those that do income versus expenses tests on the buy to let property alone. In short, if the rental income is usually around 125% of the mortgage loan interest then those lenders do not check your own personal income and expenditure.

This is clearly a dangerous position if there is no tenant in your property and you must pay the mortgage interest payments each month.

The PRA has suggested that it will introduce new rules to conduct stress tests where a mortgage lender must still ensure affordability if interest rates rose by up to 5.5%.

Comment

Whilst the move clearly makes sense to ensure landlords can afford to meet their obligations, it is also designed to make buy to let lending more difficult and thus encourage more properties to be purchased via the residential i.e. personal ownership market. In the entries of fairness we suggest that if a stress test of interest rates increasing by 5.5% is applied to the buy to let market then by default it should also be applied to the residential mortgage market.

We actually believe this could make it even more difficult for first-time buyers to get on the property ladder rather than what we believe is the intention of the Bank of England to release more property stock to residential buyers rather than landlords.

We also believe it will simply mean even bigger deposits are required for both buy to let and residential mortgages.