Buy-to-let mortgages need tougher regulations, recommends Bank of England

The Bank of England has recommended tougher rules for people seeking buy-to-let mortgages.

The bank's Prudential Regulatory Authority (PRA) is calling for a new standardised “affordability test” that will be used by all lenders. 

That would require banks to consider taxes incurred by buy-to-let properties, the costs of lending out the house or flat, and the mortgage holder’s own income and expenditure.

RELATED CONTENT

Mandy Rhodes: SNP and Labour tinker round the edges on the housing crisis

Interview with John McDonnell

Banks would have to consider whether borrowers could pay back their mortgage at a 5.5 per cent interest rate.

The PRA said the changes would reduce the number of new buy-to-let mortgages by between 10 per cent and 20 per cent by 2018.

Its report added: “This will help curtail inappropriately risky and imprudent lending - loans that are affordable under the current low interest rates environment but will quickly become unaffordable if and when interest rates rise - and lower potential credit losses and repossession costs.

“As a result, these proposals are also expected to help insulate the lenders, the financial sector and wider economy from the impact of negative shocks in the housing market.”

It comes after the Financial Policy Committee said it “remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending”.