The Bank of England has recommended tougher rules for people seeking buy-to-let mortgages.
The bank's Prudential Regulatory Authority (PRA) is calling for a new standardised “affordability test” that will be used by all lenders.
Bank of England looks to cool the property marketand lenders will be required to increase the "stress test" on borrowers and check that landlords can afford possible interest rate rises of at least two per cent - and up to 5.5 per cent - for at least the first five years.
From April 1, landlords will have to pay an extra three per cent stamp duty on second homes. From 2017, tax relief for buy-to-let landlords will be gradually be cut to 20 per cent from the current maximum of 40 or 45 per cent.This will be another blow for the smaller landlords.
Why the Buy-to-Let Mortgages Crackdown
The further crackdown comes as the Bank of England chief Mark Carney has warned that landlords are on a buying binge that could rock the UK economy.
Not only are these landlords overstretching their finances but they also stand accused of pushing house prices out of the reach for first time buyers, causing the whole economy to be at risk.
There is a growing concern that if the banks do not reduce their lending to speculators then this would continue to contribute to house prices increasing and this would not only be bad for landlords who may lose their property, if they have over spread themselves, but tenants will be also be faced with the prospect of being evicted if the property is then repossessed by the banks.
Implications for Buy-to-Let Landlords
Landlords will need to show how their expected rent matches up to their expected mortgage payments. Along with this they may also now need to show to their lenders if they have another income which can get them out of difficulty if things don’t work out with the property as expected.
Lenders will also have to build in the likelihood of interest rates rising by at least two percentage points - and check whether the deal would still be affordable after that for the landlord.
Further to the above the proposals also suggest checking affordability against a minimum, theoretical mortgage rate - even if the borrower was accepted for a lower rate.
This is a classic case of slamming the stable door after the horse has bolted.
Jeremy Leaf, a former chairman of the Royal Institution of Chartered Surveyors and north London estate agent, said: ‘This is a classic case of slamming the stable door after the horse has bolted.
"The changes the Chancellor has made to mortgage interest tax relief and higher stamp duty for landlords will have enough of an impact on buy-to-let without the need for further interference from the Bank of England.