8 Underwriting standards for buy-to-let mortgage contracts September 2016
(iii) Firms should obtain evidence of the borrower’s credit commitments, for example by
making a credit reference agency search or checking credit card or bank statements.
(c) Essential expenditure and living costs:
(i) Examples of essential expenditure related to the borrower are food, utilities,
telephone, council tax, buildings insurance, ground rent and service charge for
leasehold properties, essential travel and childcare.
(ii) Examples of essential expenditure related to the borrower’s rental properties include
management and letting fees, council tax, service charge, insurance, repairs, voids,
utilities, gas and electrical certificates, licence fee and ground rent.
(iii) Living costs are expenditure which is hard to reduce and gives a basic quality of life
(beyond the absolute essential expenditure in (i)), such as clothing, household goods
and repairs, personal goods and basic recreation.
(iv) In taking account of essential expenditure and living costs, the PRA expects firms to
either obtain details of the actual expenditure from the borrower, or to use statistical
or other modelled data appropriate to the composition of the borrower's household,
including the borrower, dependent children and other dependents living in the
household.
(d) Other committed expenditure: examples of committed expenditure are school fees, child
and/or spousal maintenance costs which will continue after the buy-to-let mortgage
contract is entered into.
2.10 Firms should put in place, and operate in accordance with, a written policy detailing how
income and expenditure is to be assessed.
Interest rate affordability stress test
2.11 When assessing affordability in respect of a potential borrower, firms should take
account of likely future interest rate increases on affordability.
2.12 In taking account of likely future interest rate increases for the purposes of its
assessment of whether the borrower will be able to pay the sums due, the firm should
consider the likely future interest rates over a minimum period of five years from the expected
start of the term of the buy-to-let mortgage contract, unless the interest rate is fixed or
capped for a period of five years or more from that time, or for the duration of the buy-to-let
mortgage contract if less than five years. The PRA also expects firms to consider the borrower’s
refinancing risk at the end of the fixed or capped rate period.
2.13 In particular, in coming to a view of likely future interest rates, the PRA expects firms to
have regard to:
(a) market expectations;
(b) a minimum increase of 2 percentage points in buy-to-let mortgage interest rates;
Buy-to-let mortgage interest rates can refer to either origination rates or reversionary rates. The PRA is not prescribing a
specific interest rate, but lenders should be able to justify the approach taken for the purposes of the affordability test.