Landlords – Changes to Buy-to-let today and in future years

  1. From 1st April 2016 – Last Friday saw the Stamp Duty thresholds increase by an additional 3% for Additional Residential Property Transactions.
Purchase Price Band Completions on or after 1st April 2016
£0* – £125k 3%
£125k – £250k 5%
£250k – £925k 8%
£925k – £1.5m 13%
£1.5m + 15%

 

  1. From 1st April 2017 – The amount of mortgage interest tax relief that Landlords are able to claim will go down to the basic rate of 20% over a four-year period.

Proposed changes to the Buy to let market

  1. The Financial Policy Committee (FPC) was set up by George Osborne in 2011 with the purpose of “the macroprudential responsibilities of protecting and enhancing the resilience of the UK financial system”[1]. At present, it is yet to be confirmed what powers will be granted to the FPC over buy-to-let lending to “protect and enhance financial stability” in the financial sector. It is thought that if the committee are granted these powers, it will dictate loan-to-value (LTV) ratio and interest coverage ratios limited for buy to let lending. HM Treasury are due to release a statement later in the year to confirm whether the FPC will be given these powers.
  2. The Basel Committee on Banking Supervision (BCBS) provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.[2] The BCBS published a document in March to recommend that lenders should keep more capital in reserve for buy-to-let borrowing as this type of lending deemed riskier than homeowners lending. The financial industry anticipates a decision made by the Committee on the actions that is due to take next.
  3. The Bank of England’s regulatory wing, the Prudential Regulation Authority (PRA) who, by contrast to the FPC, “is responsible for microprudential policy and is tasked with promoting the security of lenders while enabling effective market competition for PRA-authorised firms”[3].

Last week on Tuesday 29th March, the PRA published a document ‘Underwriting standards for buy-to-let mortgage contracts – CP11/16’[4]; to summarise the document states the PRA’s aim is to reduce the level of risk for large losses endured by lenders since the economic downturn that could threaten their stability.

The document suggests that to do this, affordability testing across the wider buy-to-let market should become standard practice, similar to the residential mortgage market, rather than solely focusing on rental income. The PRA recommends that an interest coverage ratio test and/or income affordability test is used when assessing buy to let applicants. For example buy to let lenders when assessing each individual case would need to bear in mind:

  • all the costs a landlord might have to pay when renting out a property
  • any tax liability associated with the property
  • a landlord’s personal tax liabilities, “essential expenditure” and living costs.
  • a landlord’s additional income – where this is being used to support the borrowing. This income should be “verified”
  • could a landlord afford repayments in the event of a 2% rise in interest rates?At present, the proposals in the document published by the Prudential Regulation Authority are only provisional and it is announced later in the year whether these proposals will come into force. The BBC reported that if the new rules were adopted, lending to landlords could be reduced by up to 20% over the next three years[6].
  • Plus, the PRA proposes that Portfolio Landlords (defined as landlords with 4 or more properties) undergo specialist underwriting by lenders. For portfolio landlords, lenders would be expected to assess the mortgagee’s letting experience including their full property portfolio and any outstanding mortgages, their assets and liabilities and the benefits of any new lending to the portfolio landlords’s existing portfolio. It is believed that portfolio landlords are 6-8% of all buy-to-let investors.[5]

[1] http://www.mortgagesolutions.co.uk/news/2016/03/30/buy-to-let-under-attack-whats-next-for-the-sector/?utm_source=Adestra&utm_medium=email&utm_term=&utm_content=&utm_campaign=Daily%20HouseAdvert2&utm_campaignid=249&utm_cmdid=74918

[2] http://www.bis.org/bcbs/

[3] http://www.mortgagesolutions.co.uk/news/2016/03/30/buy-to-let-under-attack-whats-next-for-the-sector/?utm_source=Adestra&utm_medium=email&utm_term=&utm_content=&utm_campaign=Daily%20HouseAdvert2&utm_campaignid=249&utm_cmdid=74918

[4] http://www.bankofengland.co.uk/pra/Pages/publications/cp/2016/cp1116.aspx

[5] http://www.mortgagesolutions.co.uk/news/2016/03/29/portfolio-landlords-to-be-subject-to-specialist-underwriting/

[6] http://www.bbc.co.uk/news/business-35917720