If you haven’t heard the term ‘PRA rules’, this is one you might hear a lot more of as we come to the end of the year, especially if you have Buy to Lets. The reason behind this is that the Prudential Regulation Authority (PRA) work alongside the Financial Conduct Authority (FCA) with regards to the regulation and supervision of Banks, Building Societies, etc. The PRA’s actions are intended to bring all lenders up to prevailing market standards during a period in which firms’ growth plans could be challenged by the changing economic landscape and the impact of forthcoming tax changes. The new rules were released in September and come in to play on January 1st 2017.
So, what does this mean? One specific rule change relates to the way a lender calculates the loan available on a Buy to Let mortgage. Normally, this is calculated with the monthly rental income needing to achieve 125% of the mortgage payment, at a nominal interest rate, normally circa 5%.
The new rules instruct the lender to use new underwriting standards, which use a stress interest rate of 5.50%, for the first five years of the loan. This makes a big difference.
Today we can achieve a calculation of 125% of 3.49%. Therefore, if we take a £1,000 a month rental payment, this would work out as a loan of £275k.
On the new rules, some lenders will be calculating 145% of 5.50%, which would work out as a loan of just £150k. An achievable loan of £125k less!
With deadlines looming, there is some quite serious competition in the Buy to Let sector to achieve business before the changes and some rates can make a huge difference in the amount of mortgage loan achievable, as demonstrated above. Terms and conditions obviously apply.
The PRA has clarified that holiday lets, bridging loans, property investment lending and corporate lending are all exempt from the new underwriting standards.
Finally, it doesn’t matter whether you an experienced landlord, or this is your first time. Property ownership can be complicated, as can the calculation of loans achievable. Explore all the options available to you. With the recent taxation changes to Buy to Lets, make sure you understand everything at the outset so you don’t regret it later! Always seek professional advice.