In its supervisory statement, SS13/16, the PRA has agreed on a phased implementation process, after feedback from firms suggested that lack of an explicit timeline could distort competition in the market. Firms will be required to implement the changes to interest coverage ratio tests and interest rate stress tests by 1 January 2017, with the remainder to be implemented by 30 September next year.
Under the PRA’s final rules, all relevant firms must use an affordability test when assessing a buy-to-let application in the form of an interest coverage ratio test and/or an income affordability test, which takes into account the borrower’s personal income to support the mortgage payment.
A minimum borrower interest rate of 5.5% must be assumed during the first five years of the buy-to-let mortgage contract, as originally proposed by the PRA.
The final affordability rules do not divert significantly from the proposals announced in March, which includes a requirement for portfolio landlords – defined as those with four or more mortgaged buy-to-let properties – to be assessed using a specialist underwriting process.
Lenders assessing landlord affordability will be required to take into account borrower’s costs including tax liabilities, verified personal income (where used by the lender) and possible future interest rate increases.
Pound-for-pound remortgaging landlords will not be subject to the rules, while capital gains tax will not be taken into account in affordability assessments.
All firms regulated by the PRA will be subject to the rules, despite concerns outlined in responses to the proposals that this could create an unfair and distorted market, with solely FCA-regulated firms not required to comply.
The statement said: “Respondents asked if the PRA would be publishing a separate set of expectations for buy-to-let mortgages subject to FCA regulation. As these mortgages are already subject to regulation, the PRA does not anticipate publishing a separate set of expectations.”
Firms are also prevented from using the SME supporting factor when conducting buy-to-let business, which reduces capital requirements on loans to smalland medium sized enterprises by around 25%.
Corporate lending, defined as lending conducted by firms’ corporate or commercial banking divisions using their specialist underwriting processes, including where lending is for mixed purposes or where the purpose of the lending is investment or development finance, is excluded from the PRA’s rules.
Lenders have been given the green light by the PRA to assume reasonable rental increases when when considering potential future mortgage interest rate rises in their affordability assessments. Since the government announced a restriction to mortgage interest relief claimed by landlords in last year’s emergency Budget, a number of lenders have tightened their interest rate coverage ratios, with more expected to follow.
The PRA is considering a thematic review set for early 2018 to assess firms’ implementation of the standards.