Unregulated buy to let mortgages could become a thing of the past

An older couple comparing household bills

2016 might well be remebered as the year of legislation for buy-to-let, Osborne came and wen; t we look back at some of the changes brough about by government and Bank of England intervention. 

Yesterday the Chancellor announced that he is extending the Bank of England and the FPC’s powers on mortgages in the buy-to-let market.  This is in response to his announcement earlier in July this year, where he considered giving the BoE new wide-ranging powers to help ‘identify bubbles and risks in the financial system’, and had named the buy to let sector as one of them.

Osborne tries to curb buy-to-let mortgages

Buy-to-let is a rapidly expanding market, with a fifth of all new home loans now for buy-to-let properties. Therefore, in an attempt to curb Britain’s buy-to-let boom, Osborne has announced that the Bank’s FPC is likely to receive powers to help police the buy-to-let market ‘as soon as possible’.  It is likely this will result in the regulating of buy-to-let mortgages and such restrictions would mark a radical tightening of the relatively unregulated buy-to-let market.

This comes only a month after the BoE and FPC warned that buy-to-let could be the next big threat to the UK’s financial stability, and also claimed that UK landlords were vulnerable to rising prices in a boom and falling values during a bust.

Osborne said, “If you look historically at the UK, one of our biggest challenges has been managing credit booms and house price cycles.  That’s why we created the FPC…to try to manage some of those risks.”

The BoE previously said the government intended to consult on buy-to-let lending later in 2015, with ‘a view of building an in-depth evidence base on how the operation of the UK buy-to-let housing market may carry risks to financial stability'.  In addition, the FPC released a statement last month saying there was ‘no immediate case for action in the buy to let mortgage market'.

The bank has previously been given powers over the housing market for regular homeowners, allowing it to set limits on debt-to-income ratios (which related to a borrowers’ salary) and loan-to-value rations (which are linked to the borrowers’ deposit).

Potential restrictions on loan size and so called risky lending was the concern

However, as a result of these new powers, it is widely understood that the bank will be able to help limit the size of mortgages relative to rental payments and also limit “risky” lending to landlords, amid fears it was fueling a risky housing bubble.  It will also be able to restrict everything including the size of loans in relation to borrowers’ income and deposit.

According to a finance ministry source, the details of the new powers remain subject to a consultation that is due to start before the end of the year.  When questioned when the FPC would be able to begin its intervention, the Chancellor said, “I’d better wait until we actually make the announcement, but (this will be) as soon as possible.”  Although the official date is yet to be confirmed, it is clear that tougher buy-to-let regulation is on its way, so watch this space.

Post consultation we  learned more about what the impact on buy-to-let would be

As of today (4th October 2016) we have a clearer view of what this summers interest in buy-to-let would be. 

It has been a busy week as Philip Hammond the new Chancellor already has removed the help to buy scheme, which perhaps a flawed vehicle did help the major house builders to keep delivering. 

The Prudential Regulation Authority has produced guidelines for underwriting buy-to-let mortgages. 

Stress tests become stricter for buy-to-let mortgages

Borrowers will face a two step change to affordability checks on mortgage applications

  1. Rental cover requirements will change from 125% to 145% of the monthly mortgage payments
  2. The Pay rate will now be calculated at 5.5%
  3. This means lenders will be looking for increased rental coverage which may be offset by personal income

This change is a reverse of the April statement which announced no special intervention was required  to control buy-to-let lending. 

What landlords need to consider in 2016

Landlords and property investors of all sizes must act swiftly to ensure they can maintain mortgage repayments and a return on investment. Ignoring these changes could cost you dearly.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.

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