The Prudential Regulation Authority (a regulatory body which is part of the Bank of England) has insisted that all buy to let lenders introduce tougher affordability assessments from January 2017. See an overview of these changes below.
Interest Rate Stress Testing
To ensure you could still afford to repay your buy to let mortgage if rates were to increase in the future, lenders will now need to take possible interest rates over the next 5 years into consideration, unless the mortgage is fixed for 5 years. The minimum interest rate used in the stress and affordability tests should be 5.5% or a 2% increase above the current buy to let rate, whichever is higher.
Affordability Testing
When assessing a landlord’s income, lenders will now need to include an affordability test; using an interest coverage ratio (ICR) test and/ or an income affordability test.
Affordability assessments should take into account: borrower’s costs including tax liabilities, verified personal income (where used by the lender) and possible future interest rate increases. If non-rental/ personal income is used, lenders will be expected to conduct a detailed affordability assessment of the borrower taking into account income and expenditure, credit commitments, essential living costs and other commitments.
How will this affect landlords?
From 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax, currently 20%. Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income. The changes will be phased in from April 2017, as the table below shows.
| Tax relief on finance cost | 2016/17 | 2017/18 | 2018/19 | 2019/20 | 2020/21 |
| Existing system | 100% | 75% | 50% | 25% | – |
| New system | – | 25% | 50% | 75% | 100% |
How will this affect landlords?
