Buy to let landlords have no worries about the Bank of England taking steps to cap mortgage lending, according to industry experts.
The new lending rules cap income multiples to 4.5 times earnings for borrowers buying or remortgaging their homes.
However, Prudential Regulation Authority head Andrew Bailey did warn the Bank has an eye on the buy to let market and will take any action required to bring the guillotine down on loans to buy to let landlords if property prices get out of hand.
“We are looking across the whole market for signs of stress. You can be assured we will be monitoring buy to let as well,” he said.
Bailey was referring to the market stress test applied to bank and building society balance sheets, and confirmed the test included buy to let lenders as well as residential lenders.
The test requires a lender’s balance sheet has to be robust enough for the bank not to fail if home prices drop in value by up to 35% and the official Bank of England interest rate climbs to 4%.
“The income multiple cap is not a suitable tool for controlling buy to let loans,” said Bailey.
“The nature of the loan requires a relationship between rental income and mortgage loan-to-value which works on a completely different basis to a normal home loan.”
However, all buy to let lenders carry a rent stress test – generally demanding that the monthly rent is at least 125% of mortgage interest charged at 5% on the property loan.
Loans that fail this test are reduced to meet the 125% cap regardless of the value of the property.
“The income dynamic is not the same for landlords,” said Bailey. “The way rent moves and affects mortgage repayments is not like working out loan affordability for a home buyer.”