Last week we heard that the UK’s second largest buy-to-let lender will tighten its affordability criteria.
From 11th May, Nationwide’s buy-to-let arm The Mortgage Works will increase its rental coverage ratio from 125% to 145%. It will also reduce its upper loan-to-value (LTV) threshold from 80% to 75%.
For such a large lender, this makes good business sense. It is a prudent response to changing market conditions. There are still specialist lenders who offer higher borrowing, and I do not expect that this will harm client choice.
A response to changing tax laws
TMW’s criteria changes are a response to changes to buy-to-let tax relief that will begin to take effect next year. The lender aims to help clients “safeguard” their cash flow.
It may also in part be a response to a regulatory review of underwriting standards in the buy-to-let sector. Between this, the change to tax relief and the higher stamp duty rate, landlords have had a hard time of late.
These tax measures might be healthy for the treasury and popular with the public. But through dissuading small investors, their outcome will be to harm not landlords, but tenants.
Landlords will need to pass on costs where possible
Landlords are running businesses, and businesses need to meet costs.
Many landlords will see their effective tax rates go up next year. We have heard from and read about landlords who have kept their tenants’ rents static for years, but must now raise them to make ends meet. And if interference stifles the market, they will be able to.
Increased taxation and regulatory intervention make it harder for cash-poor landlords to invest. This could cause the rental sector to shrink. Restricted supply will mean that market rents will rise, and landlords who remain will be able to increase the amount they charge.
The rental sector is a necessary feature of UK housing
The chancellor may succeed in boosting home-ownership, but the UK will still need homes to rent. His proponents believe that a slowing buy-to-let market will reduce competition for new homes. Displaced tenants, they argue, will be able to secure homes of their own.
But what of students? Home-leavers and graduates? Those who need to move often for work? Indeed, anyone for whom home-ownership is impractical? The market still needs to cater for them. And this is to say nothing of tenants who will still be unable to buy even if house prices do slow or fall.
The chancellor hopes that large institutional investors will step up to the plate. But big businesses need the promise of bigger returns. They invest only in large developments, not individual homes. Unlike private landlords, they do not bring disused or substandard properties back into usage.
The UK needs a robust housing market that caters for homeowners, tenants and yes, landlords. Because private landlords provide a vital function that home builders and large investors cannot.