On the affordability front, the Prudential Regulation Authority introduced rules effective in January 2017 to tighten underwriting standards following a consultation.
Highlights of the changes include the introduction of a requirement for lenders to stress test all new mortgages at a notional rate of 5.5 per cent, and factor in future interest rates when assessing affordability.
However, lenders are able to factor in the assumption for increases in rental income of up to 2 per cent – in line with the government’s inflation target – as part of the affordability process.
The PRA also stipulated special underwriting processes for landlords with four or more properties, which require them to disclose more information about their income in debts.
Extra workload
This ultimately translates to a substantial increase in work volumes, which may result in some lenders withdrawing their propositions for such landlords, according to David Whittaker, chief executive officer at Mortgage for Business.
The watchdog also said lenders should assume most future borrowers would be higher-rate taxpayers, which might mean lenders decline borrowers who are otherwise eligible today, according to Mr Whittaker.
He added: “Landlords may question why they have been asked to disclose more information than they did the first time round to secure a buy-to-let deal. A landlord’s tax affairs might be complicated.”
This has also resulted in lenders upping their rental income requirements to 145 per cent of mortgage interest rates from the standard 125 per cent.
Lenders have been trimming the rate of interest on a plethora of products, Ray Boulger, senior technical manager at John Charcol, said, adding: “In comparison, there have been no major movements in interest rates in the residential market in the past couple of months.
“The difference in rates in the residential and buy-to-let market have come down to around 60bps. A couple of years ago, rates on buy-to-let loans were between 150bps and 200bps in many cases.”
However, the more stringent affordability requirements mean that these discounted deals are out of reach for many borrowers, according to Mr Strutt.
He said: “If the borrower is seeking a low loan-to-value mortgage and the property has a decent amount of rent, there is a good chance of securing a remortgage deal. A lot of it depends on the location of the property. It may be difficult for properties in London and the south east to qualify.
“There are ways to get around the rental calculations. Some lenders allow borrowers to use their personal income as a top up for larger loans.
“Many lenders apply a generous rental calculation on five-year fixes. These loans have therefore increase in popularity as a result.”
