Simon Bayley, commercial director at Foundation Home Loans, said brokers need to consider the impact of lower pay rates offered by lifetime trackers and shorter-term fixed rate products if landlords could struggle to refinance later.
Several buy-to-let lenders are offering the products, including Foundation, but the lender said brokers must discuss affordability with clients now in the way they are already discussing the tax relief changes.
Bayley warned ‘mortgage prisoners’ could be created if the PRA confirms its willingness to adopt the proposals made in March.
“Further consideration should also be given to an eventual increase in interest rates and the effect that might have on the yields of those landlords unable to refinance and stuck on a lender’s SVR with nowhere to go.”
The Prudential Regulation Authority (PRA) launched a consultation, CP11/16 on 29 March proposing lenders place a minimum stress test of 5.5% on all buy-to-let lending.
Expected to be law by early 2017, the proposals seek to “prevent a marked loosening in buy-to-let underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses”.
The paper details all the affordability considerations including all the rental costs, tax liabilities and personal income and credit commitments, in a similar fashion to residential lending.
The document rules firms must incorporate a minimum of a 2% stress on either the initial or reversion rate, however, fixed rate products of five years or longer do not require a stress rate to be applied.
