Buy to Let Mortgage Borrowing Limits

The attacks on so called “buy to let landlords” go on, says David Lawrenson of LettingFocus.com. But the latest attack – on buy to let mortgage loan availability – are unnecessary and unwise.

So, what’s on the menu this week for private landlords, from Mr Osborne? Landlords to be tied to a post and pilloried in public squares? Landlords to be hung from lamp posts?

Well not yet, but this week did see yet another attack on private landlords, following hot on the heels of last weeks’ announcement of specially high and gouging capital gain tax rates – rates reserved specially for “buy to let landlords”.

Buy to Let Mortgage Borrowing Limits

This time it is the turn of the Bank of England’s so called “Prudential Regulation Authority” to propose underwriting standards that it thinks will stop landlords getting into mortgage payment problems if they have a hit to their income or if interest rates climb.

A consultation paper was published last week, inviting responses by June 29th.

The PRA wants lenders to assess, 1) if the rental income from a property is enough to cover a mortgage or 2) if the landlord has enough money together with the rental income to keep paying the mortgage.

To do this they want lenders to use an interest cover ratio of 125%, (so no change there), but the PRA says the calculation should take into account all costs of letting, including allowance for void periods, council tax, repairs, letting agency fees and utility costs. And they also want tax liabilities to be worked into the sums too – the last one being a direct reflection of Osborne’s own previous tax attacks on landlords.

And if lenders want to use a borrower’s personal income as justification for the loan, they will also have to carry out a detailed assessment of the landlord’s own personal finances. So a landlord borrower, can in the future, expect to have everything from their own day job income to their expenditure on everything from car loans to shopping to child care to be looked at and scrutinised.

Finally, they also want the lenders to test a borrower’s ability to pay under a notional borrowing rate of at least 5.5% over a minimum of five years from the start of the mortgage.

(In a rare piece of good news, these new rules won’t apply if you are re-mortgaging. “Oh goody”, I hear you say!)

No Evidence that Buy to Let Lending is Loose

Apparently the PRA, (for which read the super-smooth housewives-favourite Bank of England Governor, Mark Carney) is worried that buy to let lending is “too loose”.

And of course, the Chancellor is also concerned about levelling the mortgage playing field in favour of first time buyers, (though we have always said that we think the real story is about skewing things in favour of his friends in the City – the big institutional investors like Legal & General who would dearly love to seize the UK’s private renting market for themselves and away from pesky small landlords).

Of course, most lenders already impose a 125% rent-to-interest ratio based on a notional 5.5% interest rate, (and many much higher ratios and rates already), so these requirements won’t cause much change. And there will be some relief that there has not been a setting of a maximum loan to value ratio, (though restricting loan to value ratios has not been ruled out in the future).

But what is really worrying is that many lenders might now react with intrusive checks on landlords’ personal finances – leading some to require landlords to have a higher “day job” non-rental income. We think this will happen, thus reducing choice of lenders and products and leaving the smarter lenders to clean up even more of the market. (We expect to see the likes of Paragon, Aldermore, Fleet and other clued-up lenders leaving the big banks and building societies in their wake (again) as they scoop up more and more of the profitable bits of buy to let mortgage lending (see footnote 1 below)).

New Buy to Let Borrowing Limits are not Needed

We have always said that new restrictions on buy to let borrowing are pointless and are not required. Why? Well, in past recessions and periods of interest rate hikes, there is not one iota of evidence that landlords have panicked and sold up en masse. In fact quite the reverse happened. In past recessions and periods of interest rate hikes, landlords have actually scooped up more property from cash strapped owners and were able to raise rents (because high interest rates cuts aggregate residential mortgage borrowing, leading to an actual increase in renting). So, far from being a threat to the housing market, recessions and interest rate hikes have actually led to more landlord activity. Landlords have been a stabilizer to the housing market, not a threat to it.

We think that there has always been a lot of what is sometimes called “gaming” going on. This is where residential borrowers, frustrated by the difficulties placed in their way as a result of the Mortgage Market Review rules, instead apply under a buy to let mortgage in the full knowledge that they will actually live in the property themselves. Obviously the mortgage company will not be informed of this (the borrowers will use postal redirection and other methods so they don’t get caught). The mortgage companies know this type of activity is rife, they just don’t know “how rife” – but it’s the main reason why most won’t allow buy to let mortgage loans to anyone who does not already have a property of their own. Part of the real reasoning behind these latest buy to let restrictions, must be to restrict this kind of gaming from happening.

The Future for “Buy to Let”

As a result of the many and varied attacks from Osborne, some landlords will sell out – though the gouging of landlords via the specially high capital gains tax reserved for them may make them think twice about doing this.

But many people will see that, in the absence of more house building, with a rising population and duff interest rates on deposits at the bank, a better way to make money, (or at least preserve capital), will continue to come from buying and letting property.

And even if there should be a significant shrinking of the size of the private rented sector, one can surely expect rents to rise fast, as the limited supply of homes to rent begins to bite. After all, many people will still not be able to buy a home of their own – they have nowhere else to go, other than to rent.

Note 1. For the first time last week, we saw a City analyst ascribing part of the success of new entrant banks and the woes of the more established lenders, to the ineffectiveness of the latter at buy to let lending. This made us smile, because we have been critics for over ten years of the approach of the big banks and building societies to buy to let mortgage lending – including their failure to properly understand the market for private renting and to design products that meet the need of landlords. HSBC, RBS and Santander still have no real presence in the market and Lloyds’ and Barclays’ products are hopelessly unprofitable.

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