The Bank of England wants lenders to follow tougher underwriting rules when they approve loans for buy-to-let properties.
Under new regulations imposed by the BoE, financial institutions will have to take into account all costs, including tax payments that landlords might have to pay when renting out a property. These costs will come into play when determining the amount of loan to landlords for buy-to-let properties.
The BoE’s Prudential Regulation Authority (PRA) recently came up with new underwriting standards to curb a potential rise in risky lending. The PRA will require lenders to set a minimum borrower interest rate of 5.5pc over a minimum period of five years when assessing affordability.
Experts say the tougher underwriting rule may reduce approvals for buy-to-let properties by 20% over the next three years, taking into account how much they would have grown without these standards.
The ratio of buy-to-loan approvals to other types of loans has been increasing tremendously. According PRA per the research, lenders expect 20% annual growth in gross buy-to-let lending over the next two to three years, despite recent tax changes including a 3% increase in stamp duty for landlords introduced by the Chancellor George Osborne.