The Prudential Regulation Authority (PRA) is a part of the Bank of England and is responsible for the regulation and supervision of banks, building societies, credit unions, insurers and major investment firms.

It has recently extended various ‘affordability’ tests already in place for those lending to homebuyers so that buy-to-let investors will now also have to satisfy a variety of tests on affordability.

These tests will take into account rental income, the borrower’s income, essential personal expenditure and living costs, income tax liabilities, professional fees incurred through the ownership, the cost of voids, council tax, the cost of utilities and the management of the asset they are borrowing against.

In cases where rental income is likely to partially mitigate higher interest rates in the future, lenders may take this into account, but the assumption for increases in rental income should not exceed 2%, in line with the government’s inflation target.

Where a homeowner has been granted temporary consent to let, these rules will not apply. Furthermore, properties held under corporate arrangements are excluded as are holiday lets. Pound-for-pound remortgages are also excluded.

If you own more than 4 properties you may be classified as a portfolio owner, for which special rules apply.

Firms will be required to implement the changes to interest coverage ratio tests and interest rate stress tests by 1 January 2017, with the remainder to be implemented by 30 September of that year.

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