Buy to let regulation to increase

Posted by Erika Bone in Mortgages on 22 December 2015 - Erika is a Credit Analyst at checkmyfile

Over the coming months it is presumable that the UK Government and the Bank of England will be implementing a number strategies to effectuate stricter regulation of the buy-to-let property market.

16% of all mortgage stock in the UK pertains to the buy-to-let market, which in real terms equates to 1.7m individual mortgages. HMRC also recorded 2m individual landlords declaring rental income on their 2012-13 tax returns. Since the financial crisis, lending to landlords has increased on average by 5.9%, compared to 0.3% growth in the residential market.

These statistics seem to point towards the return of a buoyant housing market, augmented by a growing appetite to invest in property, and at face value this should surely be viewed in a positive light by both the Government and the Bank of England. This, however, is not the case as the Bank of England’s Financial Policy Committee has expressed grave concerns over the predominance of the growth of buy-to-let mortgages and has contended that this new trend poses a very real threat to the stability of the UK economy.

The problem would arise if there was a sudden drop in house prices. In a poll featured in the FPC’s December Financial Stability Report, 45% of landlords intended to sell if house prices dropped by more than 10%. This would exacerbate any downturn and could potentially lead to a large-scale property price crash.

The fear that investment property might be “disproportionally vulnerable” to a drop in house prices and with proven statistics issued by the Committee that show that losses on buy-to-let loans are almost twice of those incurred when lending to owner occupiers has now prompted the Bank of England to request greater powers to regulate the buy-to-let mortgage market.

Since April The FPC has had “powers of direction” over how much home-owners can borrow for a mortgage, but can only issue recommendations to lenders regarding buy-to-let loans. The committee has now appealed to the Treasury to give the Bank of England powers to place a number of limitations on buy-to-let mortgages. These could include reductions in loan to value, debt to income and interest coverage ratios.

The FPC want the Treasury to act quickly and would like to be given the new powers sometime in the New Year. This would help prevent a rush by landlords to buy new property before the Government’s new tax legislation comes into force with the advent of the new tax year. The new tax regulations will impose a 3% Stamp Duty surcharge on anyone buying a new property that will not be used as their main residence and will remove the high-rate tax relief that landlords currently receive on mortgage interest payments.

These new legislative restrictions, coupled with the anticipated establishment of new powers for the Bank of England, have disappointed a number of key bodies in the property sector with Alan Ward, Chairman of the Residential Landlords’ Association remarking, “Osbourne’s got to be very careful that he doesn’t frustrate investment in the Buy-to-let sector”.

This of course is the crux of the issue. The Government and the Bank of England have to encourage and maintain a healthy balance between property for investment, first-time buyers and the orthodox housing market and to prevent a “debt-fuelled boom” hurting the property market. Whether this can be achieved by greater regulation and higher taxes will become apparent within the next year or so.

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