The financial services regulator, the Prudential Regulation Authority, is warning mortgage lenders to be strict on their assessment of customers wanting buy to let loans.
The Bank of England’s latest Bank Overground publication, which discusses private landlord tax changes, says buy to let has become less profitable in recent years for higher-rate tax payers.
In particular this applies to the phasing out of mortgage interest tax relief for landlords, which was completed in April of this year.
However, it suggests that not all lenders have taken this into account when assessing the affordability of applicants, and thus may be lending sums which exceed the criteria for customers to comfortably repay.
The authority says: “The PRA expects lenders to take income tax into account when assessing affordability. If the mortgage interest tax relief changes were strictly enforced for affordability testing, higher-rate taxpayers would need to meet a higher stressed interest cover ratio of 167 per cent to be assessed to the same standard as an ICR [interest cover ratio] of 125 per cent for basic-rate taxpayers.”
It claims that most lenders assess higher-rate taxpayers against a minimum stressed ICR of around 145 per cent. That means some lenders are now accepting a lower net rental income for higher rate taxpayers, putting their loans at greater risk.
The PRA will now monitor lenders but it admits elsewhere in the report: “The risk posed by such lending is low at present. The overall quality of buy to let lending has improved since 2016. And tax changes introduced since 2016, including the MITR [mortgage interest tax relief], have meant the buy to let market has been very subdued.”
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