Harder Buy to let lending rules
New buy to let lending restrictions
The government this week handed new powers to the Bank of England to regulate mortgage lending in the buy to let sector effectively ensuring harder buy to let lending rules.
Because of the new powers the Bank’s financial policy committee, the guardians of financial stability, will now be able to introduce new regulations around mortgage lending for “small” landlords from early next year onwards.
The powers will enable the committee to limit the proportion of high loan to value mortgages given by providers in the buy to let sector and to cut the number of loans given to landlords who expect their rental income to only just cover their mortgage repayments.
The reason for the new rules
The bank is worried that as the number of buy to let investors increases (ironically encouraged last year by the previous chancellor opening greater freedom of pensions options) so the risk of financial instability also increases.
Recent reviews have estimated that there are over two million buy to let investors and that between them they now own around 1/5th of all residential properties.
Instability would occur if large numbers of these investors were to exit the market at the same time owing to a sudden rise in interest rates or tax changes on top of those introduced earlier this year (the extra 3% stamp duty and the gradual withdrawal of high rate tax relief on buy to let mortgages). If there was a mass exodus from the market the bank fears that there would be a “spiral of decline” in house prices which would plunge the property market into disarray.
Announcing his decision chancellor Philip Hammond said “It is crucial that Britain’s independent regulators have the tools they need to ensure that the buy to let sector can continue to make an important contribution to our economy, while allowing the regulator to address any potential risk to stability”.
Impact of the change
Various estimates have been made of how the proposed changes might affect the buy to let lending market but most experts agree that, in the short term at least, there will be much weaker buy to let activity as the new changes take effect.
Savills estimate that there could be up to a third fewer buy to let mortgages issued in 2018 bringing the total down to around 80,000 per annum.
The exact regulations have yet to be published but the overall concept should be seen as a sensible precaution. Potential buy to let investors are wise to factor in a reasonable margin between the amount of rental income and the amount of mortgage that they are paying to allow for potential mortgage increases and dormant periods when no rent is being received.
Even after the introduction of the new regulations it is expected that those on good levels of income will still attract the same level of deposit requirements as now – the tougher changes being proposed are likely to be aimed at lower income landlords who are seen as the most “at risk”.
Also investors who have, or choose to, set up a limited company as their vehicle for investment are not currently hit by the phasing out of the higher rate tax relief change referred to above.
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