Earlier this week, the Bank of England introduced a consultation on new measures to toughen up underwriting of Buy To Let mortgages.
In its consultation paper, Underwriting standards for buy-to-let mortgage contracts, the Bank’s “Prudential Regulation Authority” said it intends to establish a guardrail on underwriting standards in the buy-to-let sector to prevent these from slipping in the future and also to stop landlords becoming over-leveraged, which is risky for the property market.
Some key things to come out of the consultation:
Landlords with 4 or more properties should be deemed “portfolio landlords”, and lenders will be expected to assess the borrower’s experience in the market including their full portfolio of properties and any outstanding mortgages, the assets and liabilities of the borrower and the merits of any new lending in the context of the investor’s existing portfolio. Portfolio landlords are estimated to make up 6-8% of all buy-to-let investors.
The second key issue was that lenders should stress test mortgage lending on an interest rate of 5.5%, which will have a knock-on affect of reducing loan to values.
Landlords trying to escape the mortgage interest relief via a Limited Company should not be surprised that the PRA outlines the minimum standards will be enforced “regardless of weather the borrower is an individual or a company”.
Lenders have issued a bullish response to this report:
Sue Anderson, head of member and external relations at the Council of Mortgage Lenders, told FTAdviser the stress-testing requirements – which assume rates 2 per cent higher than current levels, and a minimum threshold stressed rate of 5.5 per cent – appear proportionate and in line with mainstream lender practice.
“This is the latest of a wave of new regulatory and fiscal interventions in the buy-to-let sector that will tend to dampen down both sentiment and the volume of buy-to-let lending,” Ms Anderson cautioned
“But overall we see this specific move largely as a pre-emptive one by the PRA designed to hardwire in good underwriting standards for the future, rather than one specifically designed to change existing current mainstream lending practice.”
David Smith, Policy Director of the Residential Landlords Association said:
“The Bank needs to be careful that it does not over-react to the current surge in buy to let applications which are aiming to beat the tax increases coming in April. These include a three percentage points extra levy on stamp duty and abolition of mortgage interest relief. It is likely that the impact of these will significantly reduce the demand for borrowing.
“We would urge the Bank to tread carefully and avoid any premature moves that could stifle the supply of the 1 million rental properties the country desperately needs.”
M.D. of Northwood, Eric Walker, commented:
“This new consultation should come at no surprise to anyone as BTL has been the Government cross-hairs for the past year now. Clause 24 and stamp duty hikes are the two key measures that the Chancellor has introduced to curb the BTL market and deter landlords from investing in the private rented sector.
However, research by Aldermore shows that over half the UK’s buy-to-let landlords (52%) expect today’s changes to stamp duty and buy-to-let mortgage tax relief to have no real impact on them.
The reality is that the people most likely impacted by these changes are tenants, as rents will rise due to decreased rental stock.
It is actually healthy to reduce loan to values and stop landlords from over-leveraging and decreases risk for individuals and the property market in general. Property has always been a long term investment, and when we look back in 10 years, landlords will wonder what all the fuss was about. In other words, welcome to the “New Normal” as buy to let lending regulation is brought more into line with that faced by residential borrowers”.
The Bank of England will begin correspondence with lenders with immediate effect with responses to the consultation paper requested by 29 June.
Calculate the cost of the new Stamp Duty rates
We have created a simple to use Stamp Duty Calculator specifically for Buy-to-Let property purchases that exchange after the 1st April 2016. Click here to see your stamp duty liability for your Buy-to-Let investment.
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