UK buy-to-let landlords are at risk to booms and busts that could magnify a housing market crash the Financial Policy Committee warns.
The Financial Policy Committee (FPC) led by the Governor Mark Carney has said buy-to-let mortgage lending has the potential to amplify a housing boom and bust.
A rapid fall in house prices in a downturn could force buy-to-let landlords to sell their properties especially if their rental incomes also fall below their interest payments, accelerating the fall in house prices.
The risk is higher now as the buy-to-let sector mortgage lending by value is up 33.3% to £1.6 billion over the year to July. By comparison homeowner mortgage lending is higher by only 8.9% over the same period.
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.
Concerns of ease to obtain loans
The FPC is particularly concerned that the rapid growing buy-to-let sector is due to lenders loosening their underwriting standards, but stopped short of suggesting government or regulatory intervention was required.
Buy-to-let mortgage lending is competing with residential home movers and first time buyers for properties but landlords have easier underwriting conditions.
Lenders require landlords to have a 25% deposit and an interest only mortgage. The rental income needs to exceed the interest payments by 125% based typically on a 5% or 6% interest rate.
In contrast the Mortgage Market Review (MMR) require homeowners to meet tighter affordability rules and lenders must assess first time buyers, home movers and remortgage buyers when securing or increasing a loan or changing the term of the mortgage.
For older equity release mortgage buyers, fixed rates can typically be secure from interest rates of 5.8% without any evidence of earnings which is important for borrowers with only pension income.
This includes taking into account your income and commitments such as child care costs and outstanding loans which is stressed tested to ensure you can afford the mortgage even with a rise in interest rates.
Changes to tax for buy-to-lets
In the July budget the Chancellor George Osborne announced changes to the tax relief that can be claimed on mortgage interest payments by buy-to-let landlords.
The tax relief will be set to the basic rate of tax which is currently 20%. The move is designed to create a level playing field between buy-to-let landlords and residential homeowners.
Currently landlords can claim mortgage interest tax relief on their marginal rate which could be as high as 45% tax with the changes introduced from April 2017.
The changes should limit the price an investor is willing to pay for a property as rental income needs to exceed interest payments to be profitable.
This would give homeowners the opportunity to trade up as the only option is for many remortgage buyers is to stay in their existing home and continue saving more for a bigger deposit.
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.
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 pay for care at home or even reduce inheritance tax owed by your beneficiaries.
Learn more by using the mortgage cost calculators, property value tracker chart and equity release calculator. Start with a free mortgage quote or call us and we can take your details.
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