PRA Changes – Stress Tests
Changes To ‘Stress Tests’
Stress tests have been under scrutiny by The Bank of England’s Prudential Regulation Authority (PRA).
The PRA’s changes have essentially meant one thing; your borrowing power as a landlord has diminished for certain products with certain lenders.
Since January 2017, lenders have been required to use a higher interest rate and bigger cushions for assessing the affordability of a Buy to Let mortgage, it’s designed to eliminate the risk that is felt to be in the market right now, and also to protect landlords in the harsher tax environment for personally geared investors.
Up until the end of 2016, most Buy to Let lenders would be happy with your rent exceeding your monthly interest payment by 125%, assuming a 5% interest rate.
So, borrowing £100,000 would require a reasonable £520.83 in rental income per month.
Fast forward to 2017 and even though rates have dropped significantly lenders are often required to assume a rate of 5.5% – so even though the rate could be as low as 1.28%, the same £100,000, would now require a rent of £665 per month on certain products. This is due to the fact that in the main stress tests have increased to 145% of an assumed 5.5% rate.
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Of course let’s not forget that much of this regulation is there to protect you as a consumer, having such small cushions doesn’t allow a lot for letting agents to take their slice, management fees, building insurance, repairs, ground rent, gas and electrical safety certificates, void periods where the property may not be let and of course the harsher tax environment for personal landlords which is the main driver for this change. So in many ways, these changes are argued to be for the better from a risk perspective.
But the real question remains; can we obtain for you the loan size you need given all this new regulation? Well, often we can and here’s why. A number of lenders have taken an innovative approach and will look at your own tax position, and income/outgoings to supplement the Buy to Let mortgage size.
Regulation is different for 5-year Fixed rate products and also for Limited companies, so assuming your circumstances and requirements allow, we can look at ways to help you get what you need in line with your risk profile.
Of course, quality advice will play its part, and that’s why speaking to a specialist is more important now than ever, we can’t ‘stress’ that enough.
Don’t Get Stressed, Get Sorted
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Our team of experts can help guide you through all of the recent changes and stress test requirements. Get in touch today by calling 0333 060 7669 or by submitting your details below.