Buy to let investors are about to take another battering from the Bank of England as the government acts to control the market.
Chancellor Phillip Hammond and Bank governor Mark Carney are concerned that loose buy to let lending restrictions could undermine the property market and put banks at risk.
From early 2017, Hammond has handed the Bank new powers to dictate loan to value and rent cover on buy to let mortgages.
Loan to value (LTV) is the amount a bank will lend against the value of a home – for example 75% LTV on a £200,000 home means an investor can borrow a maximum of £150,000 against the property.
Rent cover is a formula that assesses whether the likely rent a buy to let home generates is enough to cover the interest-only mortgage payment a borrower will pay.
Risky mortgages
The formula typically asks that rent is between 25% and 45% more than the mortgage payment.
The aim is to reduce the number of risky buy to let mortgages that landlords may find unaffordable if property prices or interest rates move significantly.
“It is crucial that Britain’s independent regulators have the tools they need to keep our financial system as safe as possible,” said Hammond.
“Expanding the number of tools at the Financial Policy Committee’s disposal will ensure that the buy-to-let sector can continue to make an important contribution to our economy, while allowing the regulator to address any potential risks to financial stability.”
The announcement follows the revelation that portfolio landlords face a tougher mortgage application process from September next year.
Lenders may leave market
More new rules mean landlords must show that they can afford mortgage payments for each specific property with a loan, not just for the one they are buying or refinancing.
Some mortgage experts fear lenders will stop offering buy to let mortgages because of the extra paperwork burden of the new measure as most portfolio landlords have an average of 10 letting properties.
Ray Boulger, of mortgage broker John Charcol, said: “Many lenders will find the significantly enhanced underwriting process uneconomic.
“Although these new rules don’t come into force until this time next year, most lenders are likely to introduce them before that date. That is likely to result in many lenders withdrawing from the market.”
