Extra powers could be handed to the Bank of England to limit buy-to-let landlord borrowing to maintain financial stability.
Chancellor George Osborne is preparing to give the Bank of England powers requiring banks and building society to restrict the size of landlord mortgages in comparison to the property value and rental income.
This follows concerns from the governor of the Bank of England Mark Carney that the growth in the buy-to-let market could be a risk to the financial sector.
He has said a fall in house prices may result in investors selling in large numbers which could destabilise the UK economy.
Greater competition from buy-to-let investors has increased the purchase price and reduced the supply of suitable properties for first time buyers or home movers.
Limits on borrowing
Banks and building societies are already required to place limits on residential mortgages, such as first time buyers, home movers and remortgage buyers.
The limits imposed by the Financial Policy Committee (FPC) require no more than 15% of all mortgage loans to be approved to high risk borrowers. This would be to homeowners where the mortgage is more than 4.5 times their income.
There are now 1.7 million buy-to-let mortgages in the UK with loans of £201 billion representing 16% of the market compared to only 12% in 2008 and 4% in 2002.
Chancellor George Osborne has said the UK needs to ensure the financial services sector is resilient enough to withstand future shocks.
For the buy-to-let market this could be achieved by limiting the loan size in relation to the property value or requiring a higher rental income to cover the mortgage payments.
In contrast there is higher activity with equity release buyers accessing cash in their property with a lifetime mortgage to help maintain their standard of living, buy a more expensive home or gift to a family member.
Changes taking effect
Recent changes to the buy-to-let market will reduce the tax relief for landlords and stamp duty will significantly increase the cost of buying property from April 2016.
Some lenders such as Barclays have already taken action requiring landlords to have a higher rental income of 135%, up from 125% of interest payments with a mortgage rate of 5% to 6% on the loan.
Paul Smee, director general of the Council of Mortgage Lenders (CML), has said “in our view buy-to-let does not constitute a market that currently requires further macro prudential intervention, especially as the effect of several recent tax changes is yet to be fully felt and evaluated”.
They have urge policymakers to be mindful of the risk of unintended consequences that could adversely affect the private rented sector, alongside their focus on ensuring that the buy-to-let market does not pose a threat to financial stability.
The CML expect 116,000 new buy-to-let mortgages in 2015 reducing to 105,000 next year and 90,000 in 2017 or a drop of 22%.
With less competition there could be a greater supply of suitable properties for home movers giving them an opportunity to trade up to a larger home.
What are your next steps?
Call our LCM mortgage brokers if you are a buy-to-let landlord with a property, remortgaging and want the best mortgage deal, buying your first home or you are planning to move home.
Learn more by using the mortgage cost calculators, property value tracker chart and equity release mortgage calculator. Start with a free mortgage quote or call us and we can take your details.
For equity release buyers our London City Mortgage advisers can recommend lifetime mortgages allowing you to receive cash from your home to spend on anything such as holidays, home improvements or even help your children start or expand a business.
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