BANK OF ENGLAND TO BE GIVEN BUY-TO-LET POWERS

Regulative control over the lending of buy-to-let mortgages will be given to the Bank of England, it has been announced. 

Chancellor George Osborne made the decision after considering the impact a market downturn would have on buy-to-let borrowers and the resulting effects on the housing market, as well as the economy in general.

The move is a considerable jump from previous plans for the Bank of England and the Financial Policy Committee to have a consultation role within the sector. The extension of powers would bring it in line with the rest of the residential mortgage market, already regulated to combat an unsustainable rise in housing prices that would lead to a collapse.

Under new laws, only 15% of residential mortgages will be able to be lent to people who borrow more than 4.5 times their income. Alongside this, banks must also check that people borrowing from them have the capacity to repay their loans, even if there is a rise in interest rates. Up until this point, these rules didn’t apply to the buy-to-let market. With the Bank of England’s new legislative powers, that could now change.

A difference between buy-to-let and residential mortgages has been that banks would take rent as the primary source of income for a landlord. In general, they require a landlord’s rental income to be at least 125% of the monthly mortgage payment. As it stands, if a landlord is unable to rent out their property, this puts them under financial pressure. This is a source of concern for the Chancellor, as a market downturn could cause a number of landlords to sell up, therefore lowering house prices. Comparatively, with a residential mortgage, it is the borrower’s salary that is considered. Some are speculating that new rules would require a landlord’s income to be taken into consideration to qualify for a loan.

Other regulations that could be introduced to reduce the risk of a property bubble and bust are a reduction in the amount of buy-to-let mortgages accepted, as well as caps on loan-to-value amounts.

If you have any queries about how these changes could affect you, please don’t hesitate to contact Orchard & Shipman today. As a company with over 25 years’ experience dealing with private landlords, our team of experts understand the impact a change in government policy can have. We’re readily available to guide and advise you through these sometimes confusing changes in legislation.