The buy to let market is becoming gradually more restrictive where the Bank of England are launching a ‘crackdown’, taking the view that an interest rate rise could crash the property market. There have also been some key changes with lenders increasing their ‘stress tests’ and becoming more stringent on affordability assessment. This is on the basis that they are looking to lend responsibly, and so question that if a rate rise should happen can landlords really maintain their portfolio and handle any rental void periods?
Lenders increasing their stress tests rates from 5% to 5.50/6.00% and coverage from 125% to 145%:- The mortgage lenders are looking at the wider financial situation of borrowers and assessing whether landlords can still afford and maintain their rental property should the rates rise in the future. This is of course seemingly responsible lending, however since April of this year some lenders; namely The Mortgage Works and Barclays, have not only increased their rate stress test but the amount of coverage required for rent to payment ratio from 125% to 145%. This is with a view to all other buy to let lenders following suit. This is a huge increase that buy to let landlords are going to have to factor into their portfolio, with some possibly struggling to re-mortgage their property for a better deal as they may now fall outside of buy to let stress test. The likely outcome of this would be that landlords will be forced onto their current lenders standard variable rate. They would then have no choice but to try and increase the monthly rental to cover this.
So how does this affect the market? From our perspective if landlords are forced to increase rental figures this will likely force ‘tenants’ to look into purchasing their first home. The issue is that ‘tenants’ will not be in a position to save money towards a deposit due to increasing rent they are paying. It then falls to parents providing their children’s deposit and using their savings….a vicious circle!
Second Property Stamp Duty & Tax Relief Changes:- Landlord and second property owners face larger stamp duty levels as of April 2016 where the existing levels are now subject to a 3% surcharge for those buying a second property. This is not only affecting landlords, but those looking to retain their existing residence, and buy an onward residence which still attracts the surcharge. If their existing property is sold within 18 months of completion on the new property this difference can be refunded. A landlord purchasing a £250,000 property now faces a £10,000 stamp duty bill compared to the same purchase prior to April 2016 where the charge would have been £2,500. In addition to this change, there is now an ‘inability’ to claim tax relief on mortgage payments for higher rate taxpayers. The limit is now set to a maximum 20% tax relief on buy to let mortgage payments meaning that higher rate tax payers are being charged 40% tax on the income, but are only able to claim 20% relief on the mortgage payments.
In summary, despite the Bank of England crackdown and the lenders concern as to whether landlords can maintain their rental property should a rate rise occur, we cannot see the buy to let market dwindling in the long run. It is possible that over the next few months whilst people adjust to these new measures that things decline slightly, but ultimately once accustomed to the changes we believe that the buy to let market will continue to increase in the long term.