The Bank of England has been granted new powers by the Government in order to further regulate the buy-to-let mortgage market.
From 2017, the Bank’s Financial Policy Committee will be permitted to instruct regulators to inform lenders to put limits on LTV’s and interest coverage ratios of buy-to-let mortgages.
These alterations will give the Bank more ability to limit the value of the loan, relative to the size of a property and the total rent landlords receive. In turn, this could leave landlords with little alternative but to increase rents.
Chancellor Phillip Hammond noted: ‘It is crucial that Britain’s independent regulators have the tools they need to keep our financial system as safe as possible. 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 risk to financial stability.’
The Bank of England warns that the buy-to-let market poses a threat to the UK’s economic recovery and borrowers could be exposed. Some lenders have already moved to increase the amount of rent that landlords must charge, relative to their mortgage outgoings.
Already this years, Nationwide and Barclays have moved to tighten their lending criteria for buy-to-let investors, raising their rental cover ratio from 135% to 145%. In addition, there have been falls in landlord insurance policies being taken out, as many would-be investors stay clear of the market.
In September, the Bank’s Prudential Regulation Authority (PRA) announced that its underwriting standards and affordability assessments are to be made tougher. It says that lenders are now required to set a minimum borrower rate of 5.5% during the first five years of a buy-to-let mortgage contract when assessing affordability.
This change is set to be enforced from the 1st January 2017.
What’s more, portfolio landlords with four or more properties will be subjected to even stricter checks on income and debt.