They’re at it again. Not content with introducing a harsh new tax regime, disallowing many expenses and increasing stamp duty for buy-to-let landlords, the Chancellor and the Bank of England have now embarked on tightening up the lending criteria for landlords and investors.
They are introducing tougher affordability tests as of next year, a move which has been described as the end of the retirement dream for many ordinary buy-to-let investors. To some extent, the rental property market has been distorted by the extremely low returns on savings available from high-street banks and other institutions. This has meant that people with savings or retirement pension pots to invest have had very few places to put their money.
Put simply, they have had a choice between the stock market and property. It’s obvious that since the financial crash of 2008, most people would choose property, where they have an income from the rent and can hope for some capital appreciation on their investment. Ordinary people tend to have far more faith in property than they do in stocks and shares.
This has led to a great deal of investment in buy-to-let property, which has been a good thing for tenants because it has made more property available and has probably therefore kept rents at a reasonable level for them.
Chancellor Announces New Stress Tests for Buy-to-let
However, the Chancellor, Philip Hammond, has announced a new set of rules governing buy-to-let mortgages which will have the effect of limiting the amount of money that ordinary people can borrow to put towards a buy-to-let property. The reason for this, apparently, is that the Chancellor is worried about financial stability because of the amount of money going into buy-to-let.
The Chancellor fears that any sudden rises in interest rates would lead to landlords not being able to pay their mortgages, and that because of the number of buy-to-let properties in the housing market this would destabilise the whole market.
It seems a strange way to stabilise the market, by putting restrictions on landlords that make their lives financially difficult. However that is what the Chancellor has decided and he is going to give the Bank of England more powers to enforce this. Affordability checks, which have already been causing problems for people trying to get mortgages to buy homes, are going to be introduced in the buy-to-let market.
Giving the Bank of England More Powers to Control Buy-to-let
The Chancellor describes this as expanding the tools that are available for the Bank of England to use in promoting financial stability. Those involved in property management in Failsworth and elsewhere, might have a different description for it.
What it boils down to is that investors applying for a buy-to-let mortgage will have to prove that they can get a yield of 25%, even if large interest rate rises make the mortgage much more expensive.
Ray Boulger, from John Charcol mortgage advisers, told the Daily Telegraph that buy to let landlords were too used to very low interest rates and could suffer considerable financial stress if rates rose suddenly.
This is very possibly true, but it’s true of everybody in the country who has any form of borrowing. What’s not clear is why buy-to-let landlords are being targeted in this way after already suffering a raft of punitive measures. It seems that the government gives no time for one set of controls to take effect before it introduces another set.
Lending Criteria Already Being Tightened
Some lenders have already been tightening their lending criteria as the result of the earlier changes to tax relief. Nationwide is now reported as refusing loans to landlords whose rentals are making a profit that is less than 45% of the repayment amount on the mortgage.
The mortgage interest rate scenario being used for these stress tests is that interest rates are at 5.5% sometime in the future. With rates at this level, the landlord must still be able to make a 25% profit on the investment. What effect will this have? It will mean that potential landlords will have to put down a far bigger deposit and borrow less in order to meet the new criteria.
You don’t have to be the Chancellor to see who is going to suffer stress in the near term – first landlords, who will be tempted to give up, and then tenants, who will struggle to find anywhere to live.