Bank Of England Proposes Tougher Checks
The Bank of England announced last month that it plans to create tougher regulations for mortgage lenders when calculating mortgages for buy-to-let landlords. The reason for this is because one in five lenders are not carrying out the necessary checks, resulting in inappropriate lending. A consultation paper was released on 29th April 2016 and you can view it via this link, Underwriting standards for buy-to-let mortgage contracts consultation paper. The consultation closes on 29th June 2016 for any feedback on this proposal.
The proposals will also cover clarification regarding application of the small and medium-sized enterprise (SME) supporting factor on buy-to-let mortgages to enhance transparency. Portfolio landlords (people with four or more mortgaged buy-to-let properties) will also face extra scrutiny under the new rules, as data gathered by the regulated authorities shows that there is an increase in observed arrears rates for these properties.
What does this mean?
UK mortgage lenders will be expected to restrict lending to buy-to-let borrowers and limit the amount landlord investors can borrow. Affordability tests will need to be applied to every application. Lenders will need to consider the borrowers non-rental (personal) incomes, as well as whether they would be able to cope with future interest rate rises to levels as high as 5.5%. Lenders will also assess the borrower’s ability to cover costs associated with letting out their property, such as tax liabilities.
The Mortgage Works (the buy-to-let division of Nationwide) announced late last week that from 11th May it will require landlords to receive significantly more rental income relative to the costs of their mortgage than is currently the case. This will mean increasing its rental cover requirement, the amount a landlord will be required to take in rent compared to the cost of the mortgage repayments, – from 125% to 145%.
What effect may it have?
It may potentially cause a stir in the housing market as it will make it more difficult for landlords to obtain a mortgage that meets the new criteria. The more difficult they are to obtain the more they will cause a dent in the housing market. A higher deposit to meet the new affordability criteria means a landlord who could have obtained three properties with a £60,000 deposit, can now only obtain two. As we discussed in our previous e-bulletin of 21st April, the demand for rented accommodation is high and supply is low. With this, tapering of mortgage relief, new tax rules, and the new stamp duty rates, it will definitely get the market talking.