The new proposal announced by the Bank of England has left thousands of buy-to-let investors forsaken. The changes require lenders to consider landlords’ overall finances, wider than just their rental income. Banks and building societies will have to re-assess whether rent charged is high enough to provide a large enough margin over the mortgage interest. They will also need to consider management costs and the impact of future higher taxes on the borrower’s cash flow.
Simon Tyler from Tyler Mortgage Management said that he has already received calls from worried clients, uncertain of if they will be able to re-mortgage their property when their current deal expires. “It is a worrying situation with echoes of 2014 when the Mortgage Market Review set down new affordability requirements,” he said
According to the PRA's consultation document, the new rules will reduce the number of new buy-to-let mortgage approvals by between 10 to 20% by the end of 2018. Some lenders will not be able to recover the lost future revenues. "The proposals seek to ensure that firms conduct their buy-to-let business in a prudent manner," said the PRA. "They aim to prevent a marked loosening in buy-to-let underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses."
“The Bank of England and the financial policy committee have identified potential systemic risks in the large increase in the buy-to-let market. It is highly likely we will give the FPC powers over the buy-to-let market. It is possible we can do that later this year.” – George Osborne, British Conservative Party, Former Chancellor
The Bank is anxious to stop another 2006/07-style boom and bust cycle getting out of control – and if that means intervening, then they will. There is a problem, however. As anyone who has studied the Soviet Union could tell you, you cannot blame the market, and you certainly cannot do it with controls. The Telegraph comments, ‘there is certainly a problem with house prices in this country. But the only way to fix that is to build a lot more homes, free up planning restrictions and raise interest rates back to realistic levels to choke off speculative demand’.
To read the policy statement for ‘Underwriting Standards for Buy-to-Let Mortgage Contracts’, published September 2016, please visit https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/policy-statement/2016/ps2816.pdf?la=en&hash=E54B88F9E1A79734639DC726BC6AFD6485DE59EF