Buy-to-let investors will soon be able to borrow significantly less from banks in what experts say is a major threat to the sector.
New powers assumed by the Bank of England will mean that loans will be further restricted based on the value of the property and the potential rental income.
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Could lenders be forced to cap their loans?
Lenders may be forced to put a cap on loans depending on the rent and the mortgage’s interest payments.
Announcing the move, which comes following a consultation launched late last year, Chancellor Philip Hammond said: “It is crucial that Britain’s independent regulators have the tools they need to keep our financial system as safe as possible.”
The new rules come amid concern about the potential risks facing the buy-to-let sector, and its impact on the economy at large.
The sector has swelled in recent years, thanks in part to a growing number of retirees looking for safe and profitable locations for their pension pots.
A buy-to-let downturn could be disastrous
But experts have warned that buy-to-let is becoming bloated and unwieldy, and are worried that a downturn could have a disastrous effect on the wider economy.
Loan restrictions will be modeled on potential interest rate rises. From January next year, mortgages will be rejected unless the borrower can prove that rental payments would cover loan interest if rates were to rise to 5.5 per cent.
Loans will also be rejected if potential landlords would make less than a 25 per cent profit.
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