The Bank of England's crackdown on landlords kicked up a notch this morning, with a set of tough new lending restrictions for buy to let mortgages.
Threadneedle Street's banking supervision arm, the Prudential Regulation Authority (PRA), has long been concerned with the risks the UK's buy-to-let sector poses to financial stability and has again tightened its grip around who can apply for a mortgage on property investment.
The new rules will require banks and mortgage providers to put borrowers through rigorous "affordability assessments" which make sure they are able to easily cover the costs of their buy-to-let mortgage in the event of rising interest rates or other economic uncertainty.
Those looking to take out new mortgages will need to demonstrate they can afford to keep up repayments if their borrowing costs shoot up by two percentage points or an interest rate of 5.5 per cent, whichever is higher. Lenders will also have to take into account other tax liabilities of the borrower and look at their other sources of personal income to judge how that could shift over the life of the mortgage.
London house prices since the referendum
The Bank added: "Firms should not base their assessment of affordability on the equity in the property which is used as security under the buy-to-let mortgage contract, or take account of a future increase in property prices." Banks could also only assume landlords were able to hike rent by a maximum of two per cent a year – in line with the official inflation target, and they must have an interest cover ratio – their income divided by interest payments – of 125 per cent, potentially more.
Separate figures out this morning showed the number of mortgage approvals in August dipped to a 20-month low in the wake of the EU referendum.
Read more: Britain needs more landlords
The new proposals won lukewarm support from industry, but the decision to phase in the regulations over the next 12 months, with the most complicated new proposals coming into force in September 2017, was welcomed.
Peter Williams, executive director of the Intermediary Mortgage Lenders Association said: "The proposals offer a sensible way forward … [but] some points of contention remain. The use of a borrower minimum interest rate of 5.5 per cent will remain a source of tension, not least if interest rates fall again."