New and tougher under-writing standards are to be adopted for almost all buy-to-let mortgages.
Critics say the changes are designed to kill off the buy-to-let market.
The Prudential Regulation Authority is telling brokers and lenders to meet the requirements in two stages – January 1 next year, followed by September 30, 2017.
Standards will be generally tougher, with more rigorous affordability testing, and higher interest coverage ratios.
The affordability test will check whether borrowers can still meet mortgage payments if their interest rate is at least 5.5%.
When assessing affordability, a mortgage lender can take into account rental increases but these must not exceed the Government’s inflation target of 2%.
The PRA also stipulates that lenders should take into account the impending changes as to the amount of tax relief landlords can claim against mortgage interest.
The standards particularly expect brokers and lenders to take particular care with “portfolio landlords” – those with four or more mortgaged buy-to-let properties. The PRA says these can be complex cases, and lenders should look at the borrower’s experience in the buy-to-let market as well as their finances.
Peter Williams of the Intermediary Mortgage Lenders Association, said the changes were in line with industry expectations after a consultation earlier this year, but said: “The use of a borrower minimum interest rate of 5.5% will remain a source of tension, not least if interest rates fall again.
“Since the consultation was first announced, we have seen BTL activity slow considerably – especially in the purchase market – which was entirely predictable following a host of fiscal and regulatory actions affecting landlords.
“Separate market data from the Bank of England today is also a timely reminder that the post-Brexit landscape remains unclear, with overall mortgage approvals having dipped in August as summer set in.
“The PRA’s goal of making best practice an industry standard for BTL lending and ensuring activity is sustainable remains entirely valid in this new landscape.
“At the same time, the new housing minister has also made clear that a good, thriving private rental sector remains important to the overall health of the UK’s property market and its ability to satisfy people’s housing needs.
“Access to mortgage finance is a vital part of this equation and as landlords continue to absorb changes to Stamp Duty and mortgage interest relief, some breathing space is needed so the market can progress into 2017 and beyond on a secure and stable footing.”
David Whittaker, managing director of Mortgages for Business, said: “We have been predicting a move to tougher stress tests by the end of the 2016 for some time, and it is positive to finally have a firm date by which they must be implemented.
“Nothing within the updated standards is a radical departure from many lenders’ existing best practices. However, those who have been slow to adjust to these standards may find themselves playing catch up with early adopters. The immediate focus for many lenders will be to adjust Interest Coverage Ratios (ICR) on shorter-term products to 5.5% by the end of the year.
“The changes are likely to encourage more buy-to-let borrowers to move to a limited company model f On top of these changes, the sector will also have to manage changes to landlords’ tax relief on mortgages over the next 12 months, which policymakers should bear in mind before looking to add further layers of regulation.
“From now on lenders and brokers will really have to ensure that they are educating landlords not only on the impact of stress tests but also the additional underwriting requirements that will bite on 30th September 2017.”
Bob Young, chief executive of Fleet Mortgages, said: “Lenders have already been moving in a number of areas since its initial publication and we can expect those who do not meet these standards to have to move further, and relatively quickly, in the case of interest cover ratio and stress test changes which need to be implemented by the start of next year – the market norm is likely to be circa-5.5 % at 145%.
“The PRA have allowed five-year fixes to remain outside these standards but I suspect if there’s a spike in five-year activity, they’ll move to include it.”