Buy-to-let landlords could face tougher borrowing tests under new proposals

The Prudential Regulation Authority (PRA) has recommended that new limits should be placed on lending to buy-to-let landlords, to help safeguard the UK economy against future shocks.

In a new consultation paper, the PRA – a part of the Bank of England – suggests that banks and building societies should apply stricter criteria when granting mortgages to landlords.

It argues that rather than considering only rental income, lenders should take account of a landlord’s wider financial situation, including all the costs they might have to pay when renting out a property, any additional income being used to support the borrowing, the landlord’s personal tax liabilities and any tax liabilities associated with the property.

The PRA also proposes that lenders should apply a stricter ‘stress test’ to measure whether the landlord could afford repayments in the event of interest rate rises over a five-year period from the start of the mortgage.

The Bank of England has previously warned that the potential for mass-selling by landlords in the event of a financial crash is a threat to Britain’s economic stability. The PRA claims that the new standards would ‘curtail inappropriate lending, and the potential for excessive credit losses’ and could reduce lending to landlords by up to 20% over the next three years.

However, the proposals have been criticised by some experts. Jeremy Leaf, a former chairman of the Royal Institution of Chartered Surveyors, said: ‘This is a classic case of slamming the stable door after the horse has bolted. The changes the Chancellor has made to mortgage interest tax relief and higher stamp duty for landlords will have enough of an impact on buy-to-let without the need for further interference from the Bank of England.’

The PRA consultation will continue until 29 June 2016.