New rules could make it more difficult for prospective homebuyers to get a mortgage.
The Mortgage Market Review, which came into force last week, is intended to prevent a repeat of the 2007-08 financial crash by introducing more stringent rules about mortgage lending.
In the new processes prospective borrowers will face more intrusive questioning about their spending patterns. In the past, mortgages were often granted on the basis of a simple multiplication of income. Now, though, lenders will take into account all regular expenditure, and will base their decision on a more thorough calculation of affordability.
The Mortgage Market Review rules apply to primary residences. However, it is thought that the new regime is already having an impact on buy to let lending.
Lenders are being warned that the more stringent checks on home loans could encourage borrowers to attempt to get buy to let mortgages for properties in which they actually intend to live. As such, it is thought that lenders may also tighten the process for buy to let applications in order to reduce the potential for fraud.
Borrowers who live in a buy to let property without the permission of their lenders are likely to be in breach of the terms of the loans, and their properties could be repossessed.
But some commentators believe that buy to let lending could be next in the firing line. There is concern in some quarters that the criteria on these loans remain too lax. In general, lenders want proof that the rental income could cover mortgage interest payments by at least 125%. Some, however, believe that this calculation is too blunt an instrument with which to really understand affordability.
Many now believe that buy to let could face further regulation following the introduction of the Mortgage Market Review. Indeed, National Landlords Association head of policy, public affairs and research Chris Norris told the FT last year that he expects there to be some regulatory “spill over”.
“The fact of the matter is most institutions that offer buy-to-let mortgages will also offer residential mortgages. From the economies of scale, what you do on one side of that divide has an impact on what will happen on the other side.”
Despite these pressures, though, many forecasters expect buy to let lending to increase in the coming months. Borrowing increased by 44 per cent in 2012 and 2013, and some commentators believe that lenders will continue to ramp up their buy to let businesses in order to mitigate any shortfall created by the more Mortgage Market Review provisions.