Buy-To-Let Market Facing Tougher Scrutiny

As well as the new Stamp Duty Tax rules that came into force this month affecting Buy-to-Let (BTL) investors, property landlords are now facing further scrutiny from the Bank of England (BOE).

Following the Chancellor of the Exchequer’s comment to the Treasury Select Committee in the Autumn of last year that he would hand more powers over the BTL lending market to the central bank, investigative work and assessments have already taken place. The BOE’s Financial Policy Committee (FPC) and the regulation arm the Prudential Regulatory Authority (PRA) have previously discussed the BTL market and so were ready and able to take an immediate look into the market and promptly related their views.

The PRA took a number of details into consideration in its assessment, including lender’s expectation that their BTL lending activity would grow around 20% per year. In order to ensure lenders don’t loosen their lending criteria to help achieve that level of growth, the regulator recommended tougher stress tests in the under-writing process of BTL mortgages are to be introduced.  These ‘tougher’ tests would mean proposed mortgages finances were tested against a higher potential interest rate of 5.5% and included all potential costs Landlords might face:

  • all costs associated with renting out the property where the landlord is responsible for payment
  • any tax liability associated with the property
  • where personal income is being used to support the rent, the borrower’s income tax, national insurance payments, credit commitments, committed expenditure, essential expenditure and living costs

Many lenders will already be operating under, or close to, these strict standards so for some this won’t have too much impact on their BTL properties and finances associated with them. As well as the potential impact on Landlords, however, when combined with higher tax payments for investors purchasing new property, these rules also have the potential to limit the 20% growth in buy-to-let loans that some banks are anticipating.

Another detail the PRA highlighted was its intention to “establish a definition of a Portfolio Landlord”. According to the March paper, an owner of four or more properties which are rented out would be considered a ‘Portfolio Landlord’.

The reason for this? To ensure that ‘Portfolio Landlords’ are easily identifiable so their mortgages can be underwritten according to specialist criteria that “accounts for the complex nature of the borrower and their portfolio of properties”.

On top of the higher Stamp Duty taxes and tighter lending rules, let’s not forget that property investors aren’t being afforded the tax breaks that investors into stocks and shares are.

Taken all together, it might seem as though the Government has labelled property investors and BTL landlords as “the broadest shoulders” of the moment. However, they are also a very important part of the economy – providing a large percentage of housing to the ever growing population and also a decent tax income for the Treasury. It’s likely then, that the Government or the BOE won’t forget the importance of the sector to the economy. Hopefully, that means they’ve finished raiding the BTL kitty, for now at least.