Buy-to-let landlords to face tougher mortgage test: New rules will ensure owners can survive interest rate rise 

  • Tougher rules will ensure landlords can survive a rise in interest rates
  • Landlords may have to put down extra £15,000 before they can get loan
  • Thousands of borrowers could be prevented from buying rental properties

Buy-to-let landlords are to face yet more pain after a regulator announced tough rules to ensure they can survive a rise in interest rates.

The measures mean investors will be forced to find larger deposits – or increase rents charged to tenants – if they want to take out a mortgage.

In some cases, landlords will have to put down an extra £15,000 deposit before they can get a home loan.

Buy-to-let landlords are to face yet more pain after a regulator announced tough rules to ensure they can survive a rise in interest rates (file photo)

Last night experts warned thousands of borrowers could be prevented from buying rental properties when the changes come in next year.

It could also affect existing landlords who want to borrow more money by cashing in equity on properties they already own.

David Hollingworth, of mortgage broker London & Country, said: ‘These rules could prove fatal for small landlords hoping to invest in buy-to-let properties to boost their incomes. Many are not going to be able to find the extra money they need for a deposit or increase rents by enough to cover the shortfall.’

The rules are being introduced by banking watchdog the Prudential Regulation Authority over concerns that there is a bubble in the buy-to-let market.

Currently, buy-to-let investors must prove to their bank they will charge tenants enough rent to cover the monthly mortgage repayments.

They are then put through a so-called ‘stress test’ to check whether they could still afford the bills if the loan interest rate shot up, typically from around 3.5 per cent today to a projected 5 per cent.

In some cases, landlords will have to put down an extra £15,000 deposit before they can get a home loan

In some cases, landlords will have to put down an extra £15,000 deposit before they can get a home loan

The PRA, which fears borrowers are being allowed to take on too much debt, yesterday revealed that from January it will force banks to make their stress tests more difficult. Lenders will have to check the customer would be able to afford their buy-to-let loan if interest rates hit 5.5 per cent.

A landlord charging £900 in rent can get a loan worth up to £172,800 under the current tests. But this will fall to £157,091 under the new tests next year – a reduction of £15,709.

To make up the shortfall, landlords will either have to save a bigger deposit or pass on the cost to tenants through higher rents. The measures are the latest in a series of restrictions on landlords by the authorities.

Experts warned thousands of borrowers could be prevented from buying rental properties when the changes come in

Experts warned thousands of borrowers could be prevented from buying rental properties when the changes come in

In April the Treasury hit investors with an extra 3 per cent stamp duty on new properties. The tax, which affects anyone buying a second home, has added £6,000 to the cost of a property worth £200,000, pushing the total bill to £7,500.

Investors face another tax blow next April when rules on buy-to-let tax relief are tightened.

Currently landlords can claim tax relief on their mortgage interest payments at their highest rate of income tax – up to 45 per cent.

Under the changes to be phased in over the next five years they will only be able to claim 20 per cent tax relief, which threatens to make buy-to-let unprofitable for some investors.

The new lending rules announced yesterday by the PRA will only affect investors who take out a mortgage that lasts less than five years.

In a statement, the PRA said that it was concerned that the Treasury tax changes would put extra strain on landlords’ budgets.

It said it feared that lenders were ‘slipping’ into handing out loans that borrowers might be able to afford today, but not in the long term.

‘The PRA’s proposals aim to prevent a marked loosening in buy-to-let underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses,’ its market review said.

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