PRA urges buy-to-let lenders to toughen up rules
The Prudential Regulation Authority, part of the Bank of England, has warned buy-to-let lenders to take into account the reduction in mortgage interest tax relief when assessing applications.
The phasing out of the tax relief was completed in April this year, which reduces the profitability for higher rate taxpayers.
The authority said: “The PRA expects lenders to take income tax into account when assessing affordability.
“If the mortgage interest tax relief changes were strictly enforced for affordability testing, higher-rate taxpayers would need to meet a higher stressed interest cover ratio of 167% to be assessed to the same standard as an ICR interest cover ratio of 125% for basic-rate taxpayers.
“Most lenders assess higher-rate taxpayers against a minimum stressed ICR of around 145%.
“So compared to basic-rate taxpayers, lenders are accepting a lower net rental income for given mortgage repayments for higher-rate taxpayers.
“All else equal, this could make lending riskier.”
The PRA went on to say that the risk posed by current lending is still low, while the quality of buy-to-let lending has generally improved since 2016.
Meanwhile lenders can take into account that higher-rate taxpayers have higher incomes and tend to have more diversified income sources to finance their mortgage repayments.
Richard Hepburn, operations manager at Gorilla Accounting, said: “With the reduction in tax relief available to buy-to-let landlords, who own property personally, there has been an increase in the amount of investors looking to purchase properties via a limited company.
“When considering the best approach, it is important to speak to a specialist tax adviser who can review your circumstances and advise on which route will be best.
“It is important to consider any other taxable income you may have and if you will be purchasing the property individually or jointly before making the purchase.”