UK lenders are introducing stricter criteria for buy-to-let mortgages, following comments from the Bank of England that the sector could overheat.
Buy-to-let Lending reached an eight-year high in 2015, according to the Council of Mortgage Lenders, as investors increasingly turned to the private rented sector for steady, reliable returns. Since then, the government has increasingly begun to target the sector, suggesting that it might overheat, or amplify wider housing market cycles and cause instability. A stamp duty hike for second home purchases came into force on 1st April 2016, prompting a surge in mortgage lending in March, as investors raced to beat the deadline.
The Bank’s Financial Policy Committee notes that growth of buy-to-let mortgage lending is “likely to slow” in Q2 2016, following the stamp duty change, with the proposed change to mortgage interest tax relief in April 2017 – currently being challenged in court by Landlords seeking a judicial review – also weighing on investor sentiment, due to its significant impact upon a buy-to-let property’s profitability.
The Prudential Regulation Authority conducted a review of lending for buy-to-let mortgages in April 2016 to determine whether a tightening of standards was required. It concluded that there was “indeed some evidence of loosening underwriting standards” among lenders and a possibility that this might increase. As a result, the PRA Board issued a Supervisory Statement to clarify expectations for underwriting standards in the market, including guidelines for testing the affordability of interest payments and a minimum stressed interest rate for use in lenders’ affordability tests.
“Market dynamics are difficult to predict and given the uncertainty around the impact of the tax and supervisory changes, the FPC decided to wait and see how the market reacted before considering whether to take action on buy-to-let,” added the FPC.
Lenders, however, have already gotten a head-start, with Nationwide (the UK’s second biggest buy-to-let lender) introducing new requirements last week for landlords to receive higher Rental Income in relation to the costs of their mortgage. From 11th May, Nationwide’s The Mortgage Works will require that ratio to increase from 125pc to 145pc. Loans for landlords with a 20 per cent deposit will also be scrapped, replaced by a minimum deposit of 25 per cent.
Now, Barclays and Lloyds Banking Group have followed suit, similarly limiting lending to landlords who can afford a higher percentage of their loan’s interest payments.
“Currently, investors have to prove they would earn enough from the rent to cover their repayments, but the new plan demands proof they would still be covered if rates soared by at least 2 per cent,” reports This Is Money.
“Experts say this would mean thousands of ordinary borrowers failing the new tests. Many of those who will struggle to qualify for a loan will be savers who have cashed in their pensions to invest in property. To pass the tests, they will have to either raise rents so much that they would be covered if interest rates soared, or borrow less.”
Steve Bolton, Founder of Platinum Property Partners, comments: “If the Government is concerned about buy-to-let investment overheating the housing market, then enforcing stricter lending criteria is a sensible measure. Taken in isolation, the pre-emptive move is responsible, as increasing the rental income to mortgage payment ratio will ensure investors don’t overstretch themselves.
“But with a Stamp Duty surcharge already in place and additional tax changes on the horizon for 2017, making BTL mortgages more difficult to qualify for will have the unintended consequence of reducing the number of BTL properties and increasing costs for tenants. Many landlords’ profits will take a tumble once tax relief is phased out, yet they will now need more rental income to qualify for an affordable mortgage deal. This is bad news for landlords looking to remortgage or expand their property portfolio, and incredibly off-putting for those entering the market for the first time.
“With mounting cost pressures, some landlords will either have to sell-up (further reducing rental property supply) or put up rents to stay afloat. Given the amount people pay in rent directly impacts what they can save towards a deposit, it is ridiculous the Government has completely disregarded renters in their quest to get people on the property ladder. This time last year, tightening lending criteria would have been a good way of preventing the market from overheating. But after several blows for landlords, it will now be one more nail in the coffin for some. Reversing next April’s tax changes is the only way of ensuring the BTL sector remains functional and affordable for both tenants and landlords.”