New affordability rules on Buy To Let lending
The Prudential Regulation Authority (PRA) imposed new underwriting standards on the buy-to-let sector from the start of the year. It offered lenders a choice of using an Interest Coverage Rate (ICR), which must stress applicants’ affordability against a notional rate of 5.5% or the use of an income affordability test, which looks at landlords’ personal circumstances to establish whether the loan should be advanced.
This highlights how important it is to use a broker, as buy-to-let lending varies significantly from lender to lender, you need to make sure a broker knows all, of your details including, personal income, other buy-to-lets (whether mortgaged or not) and other commitments, so they can establish which lender is best for you.
Some lenders have a minimum personal income of £20/£25K, if you’re self-employed, this could be an average over the last 3 years and some lenders may only use the most recent year. Lenders have a maximum aggregate lending they will do or maximum number of buy-to-lets with others. If you're an experienced landlord, some lenders will underwrite you completely differently to a first-time landlord.
You also have to establish what type of buy-to-let you have/want? Is it a consumer buy-to-let, business buy-to-let or regulated buy-to-let?
The new rule above pushes the limits around the Northamptonshire area.
Average valuation - £140,000 @75% LTV = mortgage £105,000. A standard BTL mortgage @ 2.14% interest rate = £190 pm, average rent £650.
If a lenders background calculation is a pay rate of 5.5% at 125%, their background calculation is that the rent must be £602 pm, so in the above scenario they are happy, if they use the same rate but at 145% the rent needs to be £698pm, this now doesn’t fit and the lender would reduce the amount of loan they would offer.
So as the above states, the lenders have a choice and they all vary in the rate they wish to use, so using a broker could be the only way of making sure you don’t waste your time and fees trying to find one yourself.
Date: Jan 2017