The PRA says its actions will bring all lenders up to the current market standards, while also guarding against any slipping of standards during a time when lending companies growth plans could be challenged by changing economic landscapes and forthcoming tax changes.

The new changes will come into effect on January 1, 2017 and it’s thought the PRA will review their effect again in 2018.

So what are the big changes?

Affordability assessments

This takes in a number of factors but, simply put, it comes down to whether the borrower can afford to pay back the mortgage over the long term. The long term aspect is probably the key part here, but past accounts are also important.

Affordability assessments will look at:

• Borrower’s costs. This includes everything from tax liabilities to general upkeep of a property. For example, in April 2016 it was decided that anyone buying a second property needed to pay an extra three percentage points of the value in tax.
• Verified personal income. If this is a requirement used by the lender, how much the borrower’s actual income is will become more important. This would include pensions, savings, credit card debt, utility bills and even spending on food and childcare.
• Possible future interest rate increases. See below.

The final point on possible future interest rates is important. As current interest rates are so low, it has made borrowing relatively affordable. But as many mortgages are taken over decades, the banks are worried that in the future buy-to-let borrowers won’t be able to afford the growing monthly payments if rates rise.

The growth level introduced by the PRA is either two percentage point or up to 5.5% - whichever is the higher. This means that income from the rental property should be able to cover the borrower’s costs if interest rates rise to these levels.

The Bank has also introduced these new criteria to stop lenders approving loans based on just the equity in the property or future increase in property prices.

Rising rents

One way many landlords deal with increased costs is through rent rises. But banks will now assume landlords will only raise rents by two per cent a year, in line with the official inflation targets.

Landlords must also have an interest cover ratio - worked out by taking their income and dividing it by interest payments - of 125%. This is a minimum ratio, with some media outlets predicting that lenders will opt for a 145% ratio.

What impact will it have?

Shaun Church, from Private Finance, says the new regulations could end up locking people into situations that are not financially viable for them.

He said: “I think it’s going to create a number of mortgage prisoners - existing landlords who can’t raise their rents because there’s only a finite amount of rent one person will pay for a certain property in a certain area.

“They’ll find that when they come to the end of their existing mortgage deal they’ll struggle to – through no fault of their own – refinance because the whole market has moved away from them. This could lead to millions of people – whether they rent out one property or dozens - having to switch to a standard variable rate mortgage, at a poorer rate.

“With the Mortgage Market Review, it was written into it that these types of people would be protected. Whilst we have seen the PRA suggest that pound-for-pound remortgages be exempt from the increased stress testing, we are yet to see this being adopted by lenders.”

Other issues are that it could put off people from becoming landlords at a time when the RICS says the UK needs 1.8 million extra rental properties.

Mr Church added: “With tax and stamp duty already making it harder for landlords, the new regulations will add to the perfect storm to dissuade people to rent out their homes.”

Other aspects

For landlords with four or more mortgaged buy-to-let properties – known as portfolio landlords – the new regulations mean they need to be assessed using a specialist underwriting process.

The PRA also said that the provision in Capital Requirements Regulation, which reduces the capital requirements on loans to small and medium-sized enterprises by around 25%, would not be applied where the purpose of the borrowing is to support buy-to-let business.