The Times has reported that thousands of would-be landlords face being snubbed by lenders after the Bank of England announced a clampdown on buy-to-let mortgages.
In the most concerted attempt yet to cool the housing market, the Bank announced criteria that will make it tougher to secure a loan on a buy-to-let property, including forcing all applicants to pass an affordability test based on a rise in interest rates to 5.5 per cent from today’s low of 0.5 per cent.
Banks were also ordered to take into account all the costs to a new landlord of owning the property as well as the personal tax liabilities and existing expenses of a potential borrower. The Bank stopped short of imposing specific hard restrictions, such as a maximum loan-to-value ratio.
Buy-to-let mortgages worth £37 billion were granted last year, up from less than £10 billion in 2009 and heading towards the 2007 peak of £45 billion. About half of all privately rented properties are owned by landlords with buy-to-let mortgages.
Lenders had told the central bank that they planned to increase buy-to-let lending by a fifth over the next two years, but the Bank said that its new measures could slow this rate of growth by between 10 and 20 per cent. This would equate to about 22,000 fewer loans issued over the next two years, based on January’s lending figures.
In another attempt to curb the buy-to-let market, the Chancellor has just introduced a 3 per cent rise in stamp duty on second homes coming into effect from 1st April.
What are the new rules for lenders?
The Bank of England’s new guidelines do not change the tax situation for buy-to-let properties and are about making sure borrowers can afford a mortgage on a second home. First, the Bank will ask all lenders to ensure that all the costs that come with renting out a property, such as maintenance and agents fees, are taken into account in assessing affordability. Second, any tax due on a purchase must be added into this calculation, as well as the size of a borrower’s personal income and personal debts.
How long will it be before banks implement these rules?
A consultation has begun with lending banks that will end in July. After this it will be a month or two before the rules formally come into effect. However, the Bank of England is leaving the industry in no doubt that it has made up its mind, and lenders will be expected to begin applying the new standards as soon as is practical.
What is the Bank of England worried about?
Buy-to-let lending has been on the Bank’s risk radar for some time. Officials are targeting the riskiest lending to individuals with the greatest number of properties and largest debts. The concern is that when the market turns and rates rise a large number of houses could all come on to the market at the same time, exacerbating the downward spiral. By encouraging banks to consider risk upfront, officials hope to limit the scale of any crash.
What happens to banks that don’t comply?
If a lender were to ignore the rules and carry on underwriting mortgages based on laxer standards they could be in big trouble. In behind-the-scenes briefings, the Bank made it clear that a lender that deliberately flouted its guidance would be subject to a full investigation that could lead to it being put into special measures.
If you would like to discuss your own individual circumstances, please contact us >>