How do the new affordability rules work?

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New affordability rules come into force on September 30, and apply to landlords who already have four or more mortgaged properties when they apply for a new mortgage.

The new rules do not apply to all landlords, but just to what are known as ‘portfolio landlords’. These are landlords with four or more properties that currently have a commercial mortgage. For example, landlords with six houses, four of them mortgaged, will be affected by the new rules. A landlord owning six houses with only three mortgaged will not be affected. Many landlords only have one house and do not need to be concerned about the new regulations unless they plan to purchase more properties.

Portfolio landlords will need to provide details of all rental income received from their properties, plus any other sources of income they may have. They must prove that they will have sufficient income to pay off the new mortgage and still be able to continue to pay their existing mortgages. A landlord’s income must also cover maintenance and other costs incurred in running their property business.

Lenders will work out the Income Coverage Ratio (ICR) when assessing the affordability of loans. This will normally be higher than the mortgage repayments to take into account rises in interest rate and the need to maintain the property. Lenders will set their own ICR rate, which could be calculated at 125% or more of the mortgage repayments.

Mortgage brokers can advise portfolio landlords about obtaining a mortgage under the new affordability rules.

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