With the Bank of England tightening up buy-to-let mortgage lending criteria, we take a closer look…
Why is buy-to-let lending getting tougher?
Landlords have faced a barrage of new rules and regulations, with the latest being announced this week. While previous changes have focused on tax hikes, the latest move focuses on underwriting standards. This means tougher lending criteria will be applied to landlords looking to obtain a mortgage for their buy-to-let properties.
Why are new rules being introduced?
The new rules come amid fears that the booming buy-to-let market is overheating. Lending in this part of the sector has soared and could lead to the wider property market collapsing. Figures published by the National Association of Estate Agents found that 85 per cent of its members have seen a rise in the number of landlords flooding the market ahead of tax hikes being introduced this month.
What does the Bank of England hope to achieve with the new buy-to-let lending rules?
The Bank of England hopes that the stricter lending criteria will reduce the amount of buy-to-let lending by 10 to 20 per cent in three years’ time.
What do landlords currently need for a BTL mortgage?
Until now, landlords have typically required a 25 per cent deposit to get a buy-to-let mortgage. They have also needed the rent to cover their monthly mortgage payments by 125 per cent.
How will buy-to-let mortgages change under the new underwriting rules?
The Prudential Regulation Authority - which is the Bank of England’s arm that regulates the financial sector - wants lenders to make more stringent income checks on landlords to ensure they can afford the mortgages on their rental properties. It also wants banks to test whether landlords can still afford the monthly payments on these loans if interest rates rise.
Are the new rules premature?
Some experts argue that the new underwriting rules may be premature. They suggest that the recent sharp rise in lending is down to landlords looking to meet the April deadline to avoid the 3 per cent stamp duty surcharge on investment properties.
Some landlords may also decide to exit the sector after the Chancellor announced a reduction in the tax relief available to them.
Jeremy Leaf, an estate agent in North London, says: “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. Landlords will already be put off investing further unless the numbers add up and this is a case of kicking them when they are down.”