Bank of England to force buy-to-let landlords to face stricter affordability tests
Further action could be taken to cool the buy-to-let market.
Buy-to-let landlords could face stricter lending criteria in the future, as the Bank of England wants to bring in new affordability tests.
The Bank said it wants lenders to be much stricter when deciding whether or not to approve mortgage applications.
This week it warned that around a quarter of lenders are applying “less rigorous” underwriting standards as they try to grab market share in the fast-growing buy-to-let sector.
In order to curtail lax lending practices, the Bank of England has proposed making lenders look at a landlord’s wider financial situation, not just the potential rental income when assessing their application.
New lending criteria
The Prudential Regulation Authority (PRA) – a part of the Bank – has recommended that lenders should take the following into account in order to “curtail inappropriate lending, and the potential for excessive credit losses”:
- All the costs associated with renting out a property
- Any tax bills associated with the property
- A landlord’s own personal tax liabilities, spending and living costs
- Any additional income the landlord has.
As well as the new affordability criteria the PRA wants banks and building societies to apply a stricter ‘stress test’ to potential borrowers. This is where the lender looks at whether the landlord could still afford the mortgage even if interest rates were to rise.
Under the new rules landlords might have to prove they could still afford their repayments if there was a 2% rise in interest rates.
Boost safe lending
The proposed changes aren’t designed to restrain growth in the buy-to-let sector, but ensure safe lending, says the Bank of England. There are fears that if there is an economic downturn buy-to-let investors could sell en mass and destabilise the market.
It’s believed that 75% of lenders already meet the affordability and stress test criteria the PRA wants to introduce. It is the new ‘challenger’ banks that could be hit hard, as they are still trying to get a foothold in the market.
The proposed changes have been criticised by property groups. Many believe the new tax rules, that come into effect for landlords from next week, are more than enough to restrain the market.
“This is a classic case of slamming the stable door after the horse has bolted,” Jeremy Leaf, a former chairman of the Royal Institution of Chartered Surveyors, told the BBC. “The changes the Chancellor has made to mortgage interest tax relief and higher Stamp Duty for landlords will have enough of an impact on buy-to-let without the need for further interference from the Bank of England.”
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Comments
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The issue of price comes down to supply and demand, with affordability in the mix too. while we build too few homes, then prices will go up in the long term. Short term there will always be market fluctuations, where prices may rise or fall at a different rate to the long term trend. In the South , south east and London prices have risen strongly over the past 7 years and are now well above 2008 highs (crash time!) The same isn't true of the midlands where prices have risen slowly or the north where prices have stagnated. With interest rates low many people in the south have invested in property, although the number of transactions is low (approx. 60%)compared to pre crash levels. The market is subdued and the influence of new (expensive) build is distorting price comparisons. Prices can only ever reach a level that people can afford to pay, given the constraint of mortgage lending. Make sure that people can afford the commitment that they're taking on is an important factor in stabalising the market, building more homes to satisfy demand is the next strand. Cutting immigration (300,000 migrants need 75,000 homes) might help too.
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The situation I am theorising is that with a market that has a certain amount (I have no figures) of investors, especially foreign, they are owners without commitment because they are not themselves occupiers. So the moment market perception changes, they will sell sell sell. This is the risk. Now you may argue that if prices drop then people will snap up property at lower rates.. possibly, it depends on the level of perception between a falling market or a crashing one. If the perception were to get to 'crashing' then banks may not lend 200K against a property now if they think it might be worth 175K in six months. All of a sudden you have a real problem.. the only buyers will be cash buyers.. and then the only buyers would be occupiers, investors don't buy in a falling market unless they feel it has bottomed out. It's a self fulfilling downward spiral once perception has changed when too much of the property is owned by speculators as opposed to occupiers. This whole thing, I would argue, is very finely balanced.. it would only take perception of the investor market to change and then you have some real problems.
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"If there is an economic downturn buy-to-let investors could sell en masse and destabilise the market." Do they mean that property prices would fall so that people could afford to buy their own homes? Interesting that that is not seen as desirable. I think it is unlikely to happen because if prices fall a bit, people who can currently not quite afford to buy will find that they just about can and that will stop prices from falling further. I am a small scale landlord by the way.
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07 April 2016