PRA Regulations Guide | Buy to Let Mortgages | NatWest

 

 

 

Prudential Regulation Authority (PRA) regulation changes

If you’re a landlord, or you’re thinking about becoming one, you may have come across the Prudential Regulation Authority (PRA) regulation changes. The way buy to let mortgages are approved has changed, and you need to be ready.

The PRA is part of the Bank of England. They regulate around 1,500 banks, building societies, credit unions, insurers and major investment firms. What do the PRA regulations involve?

The reason the changes have been made is to make sure lenders only offer buy to let mortgages to landlords that afford them. This means landlords now have to give their lenders additional information about their income, outgoings, assets and liabilities.

The initial changes were brought in at the start of the year. From January 1st 2017, lenders had to bring in affordability tests, stress testing and the Interest Coverage Ratio, or ICR. Further changes took effect on September 30th 2017.

Interest Coverage Ratio (ICR) helps lenders work out what you can afford to borrow

The PRA expects lenders to define their individual ICR as a ratio of the expected monthly rental income from the buy to let property to the monthly interest payments which take into account likely future interest rate increase.  

It’s used to assess the debt you intend to take on, and how easily you can pay it back using the rental income of your new property alone. If the property won’t bring in enough income, your lender can’t grant you a mortgage on the basis of rental income alone.

Terrace houses on a street

Income assessment for landlords using their personal income

Provided your Interest Coverage Ratio meets the threshold of 125%, you can apply to use your personal income, as well as potential rental income, when taking out a buy to let mortgage.

 Personal income will be considered where there is a shortfall in the required rental income being received from the property to achieve the required ICR rate however, the PRA has stated that minimum ICR rate is set at 125%.

If you want to do this, your lender will assess your income. This includes all sources of income, but also any credit and daily living costs. This can go into a lot of detail with day to day expenditure, council tax, basic recreation and repairs all taken into account. Your lender must also take into consideration things like retirement.

Stress test for future affordability

Your income may mean that you can comfortably cope with the interest payments today. But what about if interest rates go up in future, specifically within the next five years?

Your lender needs to calculate how you can respond to interest rate increases for a minimum of five years.

This means landlords now have to give their lenders additional information about their income, outgoings, assets and liabilities

What is the definition of a Portfolio Landlord?

If a landlord has four or more distinct credit tenant leases or buy to let properties they fall into a different category than those with fewer properties.

 

So if you’re currently letting out at least four properties under either of these arrangements, you are classified as a Portfolio Landlord. 

What are the new underwriting rules?

Your lender will need to use specialist underwriting rules to work out whether they can lend to you as a portfolio landlord. But, the bottom line is that the rules for firms lending to portfolio landlords have become stricter.

 

The PRA wants lenders to take into consideration these things when looking at your application:

·         Your experience in the buy to let market

·         Your full portfolio of properties

·         Your outstanding mortgages

·         Your tax liabilities

What information will I need?

If you’re looking to acquire an additional buy to let property, the kind of information you’ll need to provide will depend on how many you already have.

 

I have one or two houses and I want to buy a second or third

Under the new rules you’re not classed as a portfolio landlord, but you will need to provide more information than you did before the PRA changes.

 

Depending on what your Income Coverage Ratio is, you’ll need to provide the kind of information needed for an affordability test and stress test as described above.

 

I’m a portfolio landlord so I have three or more houses and I’m looking to buy another

On top of the other tests above your lending firm will need to take into consideration your experience in the buy to let market and more.

 

You’ll need to disclose your full portfolio of properties and their outstanding mortgages. 

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Useful links

There's a lot to think about when owning a rental property. Here are some useful links to help you get organised.

Impartial advice about Buy to let mortgages
Money Advice Service

Safeguard a deposit
Deposit Protection Scheme

Understand your obligations
Landlord responsibilities

Support for landlords
National Landlord's Association

Research rental prices
Zoopla

Read about income tax for landlords
Paying tax

Work out what it'll cost
Stamp Duty Calculator

Find a surveyor
Royal Institute of Chartered Surveyors

These links are to non-NatWest websites. NatWest is not liable for the accuracy of the information provided on these websites. 

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