A surprise announcement by the Chancellor means another headache for the buy-to-let brigade.
Landlords were dealt a blow last week when the Chancellor George Osborne announced that he is planning to give new powers to the Bank of England to regulate buy-to-let mortgages.
The news came as a surprise to landlords and the mortgage industry alike, as the Government had previously only agreed to a consultation on the subject.
So what does the announcement mean for people who rent out a property?
Osborne’s announcement
Last year the Bank of England’s Financial Policy Committee (FPC) introduced regulations designed to prevent the housing market from overheating.
The rules mean banks must now ensure no more than 15% of owner-occupier mortgages are given to people borrowing in excess of 4.5 times their income. Banks are also required to stress test borrowers’ ability to repay loans if interest rates rise.
Bank of England Governor Mark Carney asked for “additional powers” over buy-to-let mortgages, prompting the Treasury to agree to a consultation on the subject.
But Osborne told the Treasury Select Committee last week that he had granted powers to the Bank of England to intervene in the buy-to-let mortgage market.
So what happened to the consultation?
Buy-to-let mortgages are different
Buy-to-let mortgages work in a different way to residential home loans. The crucial difference is that the lender takes rent as the primary source of income – unlike with a residential mortgage, where it’s your salary that matters.
Typically lenders will want the rental income, verified by a local letting agent, to meet at least 125% of the mortgage payment each month. The extra cash is to cover voids and maintenance.
Many buy-to-let mortgages are repaid on an interest-only basis – something that’s now rare in the residential sector. This means lower monthly repayments and better tax efficiency.
And buy-to-let mortgages are not regulated by the Financial Conduct Authority in the same way residential home loans are. This means buy-to-let lenders don’t have to follow stringent rules on how they sell, promote and advertise their deals.
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What will the new powers involve?
So far there’s little detail about what exactly Bank of England intervention in buy-to-let could mean.
In 2014, the Bank of England asked for the power to cap the size of landlords' mortgages as a multiple of their expected rental income, similar to the loan-to-income cap it had imposed on residential mortgages.
So, that’s one option. Another is taking the landlord’s income from his or her job into account. Currently the ability to service a buy-to-let mortgage is generally assessed solely on rental income.
Just last month the Bank of England raised concerns that buy-to-let mortgage lending had the potential to "amplify" a housing boom and bust.
Basically this means that loose underwriting standards in buy-to-let could push up house prices, while a significant drop in house prices could lead to a widespread sell-off of rental property and larger falls in house prices.
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Jumping the gun
Industry experts are not impressed with the announcement that the Bank of England will be involved at all.
The Intermediary Mortgage Lenders Association (IMLA) said Osborne had “jumped the gun” by seemingly skipping the consultation stage.
“It suggests a stage of evidence-led policy making has been removed, and that the consultation may be limited to what those powers will be when – rather than if – they are granted,” said an IMLA spokesperson, “There is a common interest in ensuring we have a stable market for buy-to-let, and we feel this would be aided by an open debate about the case for additional FPC powers based on the strength of evidence.”
Other changes ahead for landlords
The looming prospect of regulation is the latest blow to the landlord community.
As I wrote last week, being a landlord is rarely the licence to print money people seem to think. And a raft of new rules mean turning a profit is about to become even more difficult.
The biggest change is restricting landlord’s tax relief to 20% regardless of the rate of tax they pay, a change to the tax regime that will be phased in over a four-year period. On top of that there are new rules about 'revenge evictions' and the introduction of Right to Rent which will see landlords responsible for checking the immigration status of their tenants.
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